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Tax Free California Bonds

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Sally Said:

What is the best and safest way to invest lottery winnings of $8 million or more in the state of California?

We Answered:

This is a very tough question to answer without knowing more about you and what you want to accomplish. I have been giving financial advice for over 28 years... and I would NEVER tell someone what to do with that kind of money over the phone and/or over the Internet.

Although there are very safe investments to choose from (other than bank accounts), such as: fixed annuities, equity indexed annuities, tax-free muni bonds, and U.S. government bonds (not savings bonds as their rates are incredibly low right now), my advice to you is to find a financial planner that you like and trust. That may mean having to interview 2 or 3 planners, but it important that you like their style and that you trust their advice. The best way to find a financial advisor is to talk to family and/or friends. Find out of any of them like who they work with and get a referral.

Good luck!

Kim Said:

Would you buys I-Bonds or Municipal Bonds?

We Answered:

I own municipal bonds and I am buying more bonds right now since the tax free yield is quite high. In my state I am buying California -G O's, that are backed up by the state. Try to buy insured bonds, even if the insurance companies are not strong. Buy bonds that have an investment grade rating. Even though the bonds are tax exempt for federal purposes, you need to buy bonds of your state to be exempt from state taxes.
Also muni's of US possessions are tax exempt for state purposes such as Wash DC, Puerto Rico, and Virgin Islands.

Melissa Said:

pay tax on 500$ of cd interest ?

We Answered:

CD interest is NOT tax free. You need to report it if it is a dollar or more.

There is tax free interest from things like municipal bonds (well, mostly tax free), but most CDs are not that.

Kimberly Said:

On zero coupon CA municipal bonds, is price appreciation subject to capital gains tax?

We Answered:

Zero coupon bonds are sold at a discount. The difference is *interest* income, not capital gains. Since this is a muni, it's tax free at federal level and state if you live in California.

You will only have a capital gain or loss if you sell before it reaches maturity.

Everett Said:

Municipal bonds - considering the state of many municipalities in this economy....?

We Answered:

There are a lot of things you need to consider. First municipal bonds come in 2 common forms, general obligation (GOs) and Revenue bonds. General obligation bonds are safest. A general obligation bond is backed by the full taxing power of the municipality and paid for with taxes. These bonds are considered part of the state's budget which are required by law to be balanced, which means they will raise taxes and cut spending on programs in order to ensure this debt is paid for. While nothing is guaranteed GOs are pretty close. Revenue bonds are a totally different story, they are backed by projected revenues on municipal projects like toll roads and usage fees, these bonds are riskier because they are only as good as the project, many of which may not be completed and/or are put on hold because they can't raise all the necessary funds. No revenue means no way to pay the debt. The fiscal health of the municipality and the profitability of the project need to be evaluated before purchasing these securities.

Now all that being said historically the default rate on municipal bonds is less than 1% and the recovery rate even on the worst defaults in history was 70%. Even during the Great Depression no state defaulted on their general obligation bonds, and revenue bond defaults remained in the low single digits, only 2.7% defaulted between 1929 and 1937. Municipal bonds are still trading at over 100% of the equivalent treasury and with the tax benefit, the risk is very small. I still think they are a safe option but like all investments you have to know what you are actually investing in, staying away from high risk states, particularly California, Nevada, and Florida and focusing on GOs should reduce most of the risk, but for investors who are willing to really look into individual issues from those states could make huge profits as a result. If you aren't willing to do the due diligence sticking with a high quality municipal bond mutual fund is a great option. Your Ad Here

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