The Brittens’ Investments, Research Paper Example

Abstract

This paper is based on an essay question about a couple named Bernie and Pam Britten. The couple would like to find a good place to invest their $40,000. Their financial advisor, Lew McCarthy, has given them some helpful suggestions.

The Brittens’ Investments

If the condominium will be used as a primary residence than the marginal tax rate would not apply. However, if the condominium is to be used as a second home or a vacation home, then the after tax yield would be $10,144. The down payment or initial investment would be $10,000. An annual increase rate of 2 percent on 10K equals $200. The marginal tax rate of 28 percent would mean that the $200 would have a tax of $56. $10,200 minus $56 equals $10,144. The municipal bonds are tax exempt on the federal level. State and local taxes vary widely between states. For the high-yield corporate stocks, qualified dividends are taxed at 15 percent, meaning that the after tax yield will be 6.8 percent. The savings account will be taxed at 28 percent, making the annual yield just 2.16 percent. Finally, the high-growth common stocks, if held more than a year will be taxed at 15 percent as they would be considered long-term capital gains. The after tax yield is therefore 8.5 percent.

The first step for the Brittens would be to purchase the condominium. Although it is not the only option for them, they could do well with their purchase due to home buying incentive programs set up by the government and the absence of rent payments if they choose to leave their current residence. High-growth common stocks may have the most appeal but they can be risky and are less liquid. They should use the part of their funds that would deal with risks and long-term investments for this option. Municipal bonds are also a good choice. Earnings on them are not taxable they are generally less risky. Due to record low interest rates in most commercial savings accounts, this type of asset should be viewed as a safety net rather than an investment.

On a final note, $10,000 should go towards the condominium; $7500 to the savings account as a safety net; and the rest should be used for corporate stocks, common stocks, and municipal bonds.

References

Jobs and Growth Tax Relief Reconciliation Act of 2003 – Wikisource. (n.d.). Wikisource, the free library. Retrieved September 4, 2010, from http://en.wikisource.org/wiki/US_Public_Law_108-27