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CHAPTER 10

Another important factor to tax shelters is that the government tries to not let you take advantage of them if your income is substan- tial. Contributions to Roth IRAs are phased out at certain income levels, as well as the tax-deductibility of traditional IRA contribu- tions. Before you jump in and decide that one of these investments is a good idea for you, you need to know if it will be beneficial to you in the long run. Plus, you need to see if you will even benefit from the tax deduction, or if your adjusted gross income is above the required maximum.

TAX-FREE INVESTMENTS

We discussed the different types of tax-free investments in the bonds chapter but it bears repeating here. There are a number of dif- ferent types of bonds that you can invest in that will give you tax- free returns and interest. The first type is government securities, such as Treasury bills, notes, and bonds. These equities are fully tax- able for federal tax purposes, but are tax-free from state and local taxes. If you live in an area of the United States that has high state and local tax rates, these would be a good way to help save on those taxes. Now if you live in a state like Wyoming that has no state income tax, there is no reason from a tax point of view to invest in U.S. government securities.

Municipal bonds that are offered by state and local municipali- ties are free from federal taxes. Plus, if you live in the area from which the bond is issued, they will be free from state and local taxes as well. Therefore, if you live in Albany, New York and purchase a New York State general obligation bond, you would receive tax-free income from the bond. However, if you purchased the same bond, but lived in Michigan, you, generally wouldn’t receive the state income tax-free, although it would still be tax-free on the federal level.

Beware that you don’t undermine your tax-free investment income by purchasing the equity within a qualified plan. By holding tax-free muni bonds and muni bond funds within an IRA, 401(k), or other tax-qualified plan, you negate the benefit derived from the bond or bond fund. This is because when you begin to take distribu-

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