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Trump’s Tax Reforms May Be Another Reason to Avoid Municipal Bonds

By U.S. News & World Report

The new administration seems firmly committed to slashing individual tax rates. That’s good, but it raises the issue of whether it still makes sense to invest in municipal bonds.

These securities typically have some favorable tax-related attributes. Interest income from muni bonds is usually exempt from federal taxes and in many cases from state income taxes, also.

Whether you own some of these securities or not, there are some things you need to know.

[See: 10 Long-Term Investing Strategies That Work.]

How they work. Such bonds typically have a lower yield than taxable bonds of an equivalent quality and duration. But when the two types of security are compared on an after-tax basis the muni bonds often look more attractive, especially if you are in a high tax bracket.

“For higher earners or higher net worth individuals they are definitely more beneficial,” says Jeff Carbone, managing partner at Cornerstone Financial Partners? in Charlotte, North Carolina.

That’s because income tax eats into the return of taxable bonds more when the individual is in the higher tax bracket. For example, if you pay a top rate of tax of 39.6 percent, then a muni bond yielding 3 percent would be equivalent to almost 5 percent before tax. Yet for someone in the 20 percent tax bracket, the taxable bond equivalent would be a yield of 3.75 percent.

The higher percentage of income tax you pay, the more attractive these muni bonds look. But with personal tax rates likely to drop, should you bother?

For many people, the answer is no. That’s because many people have their all investments held either in 401(k) plans or IRA accounts. Those products already give you the benefit of deferring your income taxes to a later date. There is no additional tax benefit to holding muni bonds within such a product.

[See: The 10 Best Dividend Stocks of 2016.]

Administrators of 401(k) plans should be keenly aware of this so they likely won’t provide a muni-bond investment choice for you. If you find muni bonds held in either type of account, it is probably time to dump them.

If you do have investments that are outside 401(k)s and IRAs, then congratulations! You’ve obviously been saving, and better still, these tax-free bond investments may still make sense. However, there are some things you need to know.

Some good news. “At today’s market prices you benefit from owning a muni bond over a corporate bond even if you only have a 20 percent tax rate,” says David Hammer, head of municipal bond portfolio management at Pimco.

Given where municipal bonds are trading now, the yield on the muni will be higher than that of the after-tax yield of an equivalent taxable bond if your tax rate is 20 percent or higher. If you pay a lower tax rate, the muni makes little sense right now.

Higher rates, volatility ahead. Investors need to prepare themselves for a bumpy ride. A Pimco report says municipal bonds will be more volatile in 2017.

The price of munis, like all bonds, move in the opposite direction to interest rates. If interest rates go up (or are expected to do so) then muni prices will fall.

Likewise, the uncertainty over exactly what policies the new White House administration will or will not introduce will tend to make the bond market more volatile as well. Investors hate uncertainty.

[See: 9 Psychological Biases That Hurt Investors.]

Not all muni bonds are created equal. “There are lots of muni bonds; some are safer than others,” says Jim Kee, president and chief economist for South Texas Money Management of San Antonio.

Some municipalities aren’t as creditworthy as other ones. You may recall the recent fiscal crisis in Puerto Rico that caused some anxiety for muni investors. Even in a state which has good credit, not all bonds are created equal. Some have more risk than others.

The long of the short of the multitude of different bonds is that if you are going to invest in single securities then you need to do research on the credit quality of the bond.

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Trump’s Tax Reforms May Be Another Reason to Avoid Municipal Bonds originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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