Money Management Q&As

Comparing muni and taxable bond yields

Q. I'd like to put some money into municipal bonds that are exempt from both federal and state taxes. Is there an easy way to compare their yields with the after-tax yields on taxable bonds?

A. Based on your taxable income, filing status, and state of residence, you can get a quick comparison by using the Bond Market Association's online calculator (available at http://www.investinginbonds.com/cgi-bin/calculator.pl). As an example, for a married California couple with taxable income of $120,000 (after deductions and exemptions), a 3.0 percent muni bond yield would be equivalent to a 4.6 percent taxable bond yield. This takes into account the fact that the state tax on taxable bond earnings is deductible for federal tax purposes. The calculator includes a table of equivalent yields for various bond interest rates.

Q. When we sold our former home for $450,000 last year, the agent told me he didn't have to notify the IRS of the transaction. That makes me wonder if I need to keep records relating to our new home for tax purposes. Can I discard them?

A. Better not. If you sell your present home before living there for at least two years, the sale will have to be reported. Even on a later sale, a report will be required if the price is more than the amount of gain you can exclude ($500,000 for a married couple, $250,000 for a single owner). Then you'd need records to prove your cost basis. Or suppose you eventually move but rent your present home instead of selling it. In that case, your records would support the depreciation deductions you could take.

Another possibility is that you might give the house away rather than sell it. If so, the recipient will need your records, because his or her basis for gain on a future sale is what you paid to buy and improve the house, not its market value at the time of the gift. Finally, the records would be useful in claiming a loss if your property ever suffers damage.

Using a TOD to re-register securities

Q. My brokerage account is in my name alone, but I've given my wife a durable power of attorney over it. To save some estate administration costs, I'm thinking of re-registering my securities in TOD (transfer on death) form, with her as beneficiary. Would that supersede the power of attorney?

A. No. A TOD doesn't give the beneficiary a right to assets until the owner dies. If you become incapacitated and aren't able to undertake transactions that require your signature, the power of attorney would allow your wife to do so. By the way, a few states don't permit TODs or else restrict their application, but even if you live in one of them, you can register a security in TOD form if the issuer is incorporated elsewhere.

Paying future tuition at today's rates

Q. A fellow alumnus has told me about a private college savings program that would let me prepay my son's tuition at my alma mater. What are the pros and cons?

A. You get a big advantage, assuming the program values your contributions at current rates. For instance, if the school's tuition this year is $20,000, a $10,000 investment now pays for half a year's attendance in the future, however high the rate may be then. (Average private four-year college tuition rose 6 percent in the past year.) But if your son doesn't attend the school, your refund might well come to little more than your original investment.