Investing 102

[GregWeld]

A thought occurred to me this morning as I was shopping for some corporate bonds - that maybe people really don't understand the difference between Muni bonds - corporate bonds - and stocks and how it affects your taxes.

So here we go:

Stocks: You're investing in the company - so think of it as you're becoming an owner. Some stocks share their profits with the owners in the form of a dividend. QUALIFIED DIVIDENDS (please note that term - it's important) are currently taxed at a maximum rate of 15%

Corporate Bonds: These are basically a corporation BORROWING money at a rate they state - and a maturity date they state. Example - Goldman Sachs (GS) issued bonds recently paying 5.75% with a maturity date of 1/2022 -- so it's a 10 year bond @ 5.75%. When you buy these -- you are a LENDER - and as such you collect INTEREST - Interest is taxed at your ordinary tax rate. These should be bought inside your IRA/ROTH/401 unless you're living off the income and are willing to pay ordinary income tax on the earnings (as I do).


MUNI BONDS: Short for MUNICIPAL BONDS. These are issued by County - State - City - School Districts etc. They are - IN MOST CASES - tax free. As such the interest rate is lower. You are a lender to that entity - you collect interest payments (generally every 6 months). The bonds have a face value and a maturity date. You'll get the interest until the maturity date at which time you'll get your capital back. They're backed by the "full faith and credit of the issuing entity"... in other words - some form of government - this is why they're considered "safe".