Taxes are a necessary evil because they help fund the society where we live. However, our responsibility as investors is to minimize our tax bill in the most efficient legal way possible.
Two ways I have previously discussed are through Roth IRAs and Municipal Bonds. But given $6,000 a year to commit, which method would be the best way to utilize our after-tax dollars?
Today’s showdown will help us better allocate our funds for today and the future. First, I will start with how I employ both of these tax-free investments; then, I will discuss the pros and cons of each. Finally, I will give my final assessment and announce the champion. I always love a good fight! Let’s begin.
The Magic of Dividends
Roth IRA employment. I use my Roth IRA as part of my long-term strategy and a way to pass tax savings to my children. I mainly use index funds in my Roth because I plan to convert them to high-yield devices when I turn 60.
Index funds allow me to “fire and forget” my Roth investing. If I put $2,000/year in my Roth for the next 20 years, at an 8% return, that would give me $105,000. From there, I can convert that to an income portfolio, providing me a dividend yield of 9%. That is roughly $800/month, all tax-free. Now that is amazing.
Municipal Bonds employment. I use my tax-free municipal bonds in the form of a Closed-End Fund or CEF. My particular Muni CEF is Nuveen AMT Tax-Free Municipal fund (NVG). I love my muni CEF, and it yields roughly 4%.
I use NVG in my income portfolio. A 4% yield may be low for an income investing portfolio, but you have to remember I don’t pay taxes on the dividends. My muni CEF is also a great way to diversify with real estate investment trusts, business development companies, and dividend ETFs.
I currently have roughly $3,100 in my allotment of NVG, which pays me $12 every first of the month. I do not have dividend reinvestment turned on for NVG because I reinvest into other securities on a discount.
Why Do I Need to Invest in the Stock Market?
Pros and Cons of Roth IRAs. The pros are that you can invest in pretty much any security on the stock market inside your Roth IRA.
The major disadvantage of the Roth IRA is that you will need to wait until 59 ½ to withdraw your cash. That is a long time to taste the sweetness of dividend income. Of course, you can open different brokerage accounts, but I love receiving my dividends today.
Waiting is the right thing to do because of the tax-free withdrawals in the future. Also, your children can continue to receive tax-free withdrawals, but they have to liquidate the account within ten years of your death. Still, it’s a great deal.
Pro and Cons of Municipal Bonds. With my muni CEF, I can take my tax-free dividends today. Every month, I receive my $12 of goodness, and it tastes great.
Retire Early as a Well-Rounded Millionaire
The major disadvantage of munis is that you cannot diversify them. Sure, you can find other muni CEFs or ETFs, but they are all in the same asset class. This means you are subject to allocation risk, which means they all move in the same direction at the wrong time.
The Champion. The winner of this competition is the Roth IRA, mainly because of diversification. The munis have the advantage of current income, but diversity is the overwhelming factor in the competition.
Use both. Perhaps the best advice is to use both in your portfolio. Investing is always about looking at things from multiple angles. We want to ensure we fund our future retirement as well as live our best lives today.
Let’s make a road map to wealth. First, we need to maximize our Roth IRA contributions at $6,000/year. After that, we should aim to put at least $2,000/year into muni funds. That’s a total of $8,000/year towards tax-free living.
The good part of this plan is that we can also leave the munis to our children. They won’t have to liquidate these assets, and they could liquidate the entire Roth and invest in munis. I’m sure there are better ways to diversify their cash, but it sounds terrific on paper.
Why is being tax-free so important? So many people plan their retirement for less money and lower taxes. Nonsense. I am going to be super-rich in the future. I believe that every year, you should be making more income than the last year.
Annuities vs. Dividends
Increasing your income every year takes financial intelligence. Also, with inflation growing at a higher rate than average, we are income-sensitive. We need income, now and in the future.
Whatever steps we can take today to lower our taxes in the future, we need to evaluate and leverage. Roth IRAs and municipal bonds are just a couple of ways to reduce our tax bill.
If you can’t invest $6,000/year into your Roth, it is time to re-evaluate what you are doing in life. How are you spending your free time? How are you spending your money? Ask yourself the tough questions before life asks you.
Conclusion. That’s all I have for this particular competition. We should use both of these fantastic products together because they synergize well. Please join my Facebook Group if you want the latest articles and free books delivered to your news feed. Also, you can contact me inside the group and ask questions. I also have a Facebook Page where you can see my latest articles.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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