[Rhodes22-list] Tax Advice? 401k's

[Bill Effros]

Slim,

These things keep moving around, but it pays to watch them.

Here would be an example from a couple of years ago:

Borrow $100,000 at 0% interest.  (Harder now, but not impossible.)  Buy 
low yielding Municipal bonds at a discount.  (You get $110,000 worth of 
bonds for $100,000.)  The bonds pay tax free $3,300 a year.  You hold 
them for between 5 and 10 years, until maturity.  At that point they are 
redeemed by the municipality for $110,000.

Looking at the 10 year model for mathematical simplicity, you make 
$33,000 tax free, and $10,000 taxable--a $43,000 profit on money that 
was never taxed in the first place.  To make the whole thing tax free, 
you also buy some high yielding municipal bonds: $90,000 worth for 
$100,000.  These pay 10% interest for the last year before maturity.  
You get another $9,000 tax free, but write off $10,000 taxable income 
from the original bonds.

If you can work it all out, you make $42,000 tax free on both ends--this 
is probably more than $43,000 profit, pay tax on $10,000.

This is an example only.  There are kinks.  You are not allowed to 
borrow tax free money and invest it in triple tax free bonds.  So you 
borrow the money to pay for your new house, and use the money put aside 
for the new house to buy the bonds.  This is where it pays not to be all 
tied up by government pension rules.

It's work, but it's legal.  No tax on either end.  If you're smart, you 
keep reinvesting the dividends in more and more municipal bonds, 
arranging the purchases so that all of the taxable gains are offset by 
taxable losses.

You can get into this game for $10,000 plus a brokerage fee.  You must 
minimize purchases and eliminate sales so that the broker eats the least 
out of your profits.  Pick prosperous cities where there is virtually no 
fear of default.  Bail out if any city starts to wobble.  Pick revenue 
backed bonds (toll roads, bridges, etc. for even more safety) as opposed 
to general obligation bonds.

This example is extremely low risk, simple once you get the hang of it, 
and can be employed by people with modest means provided only that they 
have good credit ratings.  Actually using your credit responsibly will 
improve your credit rating over time as opposed to having a good rating 
and not using it.

There are 100s of legal devices like this one, but you must find one 
that works for you, and your investment money must be in a place where 
it is legal for you to invest it in ways like this.

Bill Effros

Slim wrote:
> On 11/12/06 11:17 AM, "Bill Effros" <bill at effros.com> wrote:
>  
>   
>> By not having money in 401ks I was able to make investments, using money
>> that had never been taxed, in things that never will be taxed.
>>     
>
> Bill, what investments are those?  I don't have a 401k--I have a SEP which
> is funded with pre-tax dollars and brings down my taxable net but it'll be
> taxed when I draw from it.  My ROTH is the opposite.  But no tax on either
> end?
>
> Slim
>
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