Is it possible to create tax-free income for life?

As it’s been said before, “there is no free lunch,” and it is no different for municipal bonds. The rules of asset diversification apply even in the compelling case of tax-free income. Bonds have historically had little correlation to equities except in market crisis situations, so creating a portfolio of both equities and bonds makes a whole lot of sense as a long-term investor.

But when considering other fixed-income vehicles such as annuities or real estate, which both generate taxable portfolio interest, individual municipal bonds make a good alternative. Take the case with your typical annuity (fixed or variable) that carries an average 2 percent to 3 percent annual expense charge when you consider administrative, mortality and expense, and mutual fund costs. And although you may not see it, don’t forget there will be a commission paid to the broker that sold you the annuity. First year charges can easily exceed 8 percent.

Finally, you still have to pay taxes on the annuity income stream on all gains beyond your cost basis. Alternatively, you can invest the same amount into a diversified municipal bond portfolio and pay no taxes and receive tax-free income until the bonds are called or mature. As an added bonus, your estate will receive a step-up in basis at your date of death, greatly reducing any potential capital gains.

Be the first to comment

Leave a Reply

Your email address will not be published.


*