Wednesday, May 02, 2007

Making Bonds Part Of My Portfolio

Gentlemen prefer bonds. - Andrew Mellon

In the past year, I began to include municipal bonds in my investment portfolio. I started doing this for three reasons:

Triple Tax Free

Owning my state's municipal bonds enables me to earn income triple tax free - federal tax free, state tax free and local tax free. As a result, my Adjusted Gross Income is minimized, sometimes enabling me to take advantage of some tax deductions or tax credits.

Alternative Minimum Tax (AMT) FreeTax free funds often are partly subject to AMT. Buying individual municipal bonds ensures I can choose ones where the income won't be counted toward triggering the AMT.

Guaranteed Income and Guaranteed ReturnsEach bond makes an annual or semi-annual interest payments. Also, I plan to hold each bond to maturity. Therefore, the face value principal will be paid back to me and my yield to maturity is fixed. I won't need to worry about fluctuations in net asset value that happens with municipal bond mutual funds.

Buying municipal bonds is easy to do. I purchase bonds through a discount broker, either TD Ameritrade or Charles Schwab. The transactions can be done via the Internet, but I recommend using a live broker for the first few purchases. (There is no extra charge at this time for using a live broker to trade bonds or CDs.)

When making a bond or CD trade, provide the broker the following information: interest rate, maturity date and face value. The commission charge is built into the interest rate, and thus, one will be quoted the net interest rate. I like to buy insured bonds, which means the bond is guaranteed against default. In addition, I like to keep maturities between 3 to 7 years.

So far I am pleased with my bond portfolio, which I created in the summer of 2006. I was able to lock in 3.4% to 4.6% triple tax free interest rates for 3 to 4 years, and interest rates have dropped since then.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

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