If a 28-year-old individual with $60,000 income inherits $100,000 and is concerned about taxes, what should their registered representative recommend?

If a 28-year-old individual with $60,000 income inherits $100,000 and is concerned about taxes, what should their registered representative recommend?

• A. Investing in a high-yield corporate bond fund
• B. Putting the money in a tax-exempt municipal bond fund
• C. Investing in a traditional savings account
• D. Funding a retirement account

Answer: (B)

The suggestion to invest the inherited funds in a tax-exempt municipal bond fund is particularly appropriate for the individual concerned about taxes. One of the primary advantages of municipal bonds is that the interest income they generate is generally exempt from federal income taxes, and in some cases, state and local taxes as well. This can provide the individual with a solid return on investment without an immediate tax burden, aligning with their concerns regarding tax implications. Investing in a high-yield corporate bond fund might present a higher potential return, but this comes with greater risks and typically results in taxable interest income, which could increase the individual's tax liability, contradicting their concern about taxes. Placing the money in a traditional savings account generally yields very low interest rates and any earnings would be taxable as ordinary income, which isn’t advantageous for someone looking to minimize tax impact. Funding a retirement account could be beneficial for long-term savings, but depending on the type of retirement account, it may not provide immediate tax relief specific to the inherited funds and could limit access to the money for a certain period. Given these considerations, the recommendation to utilize a tax-exempt municipal bond fund effectively addresses both the desire for investment growth and the need to manage tax exposure.

The suggestion to invest the inherited funds in a tax-exempt municipal bond fund is particularly appropriate for the individual concerned about taxes. One of the primary advantages of municipal bonds is that the interest income they generate is generally exempt from federal income taxes, and in some cases, state and local taxes as well. This can provide the individual with a solid return on investment without an immediate tax burden, aligning with their concerns regarding tax implications.

Investing in a high-yield corporate bond fund might present a higher potential return, but this comes with greater risks and typically results in taxable interest income, which could increase the individual's tax liability, contradicting their concern about taxes.

Placing the money in a traditional savings account generally yields very low interest rates and any earnings would be taxable as ordinary income, which isn’t advantageous for someone looking to minimize tax impact.

Funding a retirement account could be beneficial for long-term savings, but depending on the type of retirement account, it may not provide immediate tax relief specific to the inherited funds and could limit access to the money for a certain period. Given these considerations, the recommendation to utilize a tax-exempt municipal bond fund effectively addresses both the desire for investment growth and the need to manage tax exposure.