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Corporate Bonds -- taxes, and other questions

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Money Talk > Investing, Stocks and Bonds

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Cabo Wabo
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Corporate Bonds -- taxes, and other questions  Reply with quote  

I have a few questions about corporate bonds. I've done some initial reading up on the topic, but I've still not been able to find all the info I'm looking for (and in a clear and concise format).

Basically, my wife and I recently inherited some corporate bonds. There are six different bonds, with varying values. None of them have matured yet -- the earliest maturation date is around September of 2013, with the latest being in 2017, I believe.

My main question is how these bonds will be taxed if/when we decide to cash any of them out. Does the date that you cash them out make a difference? (that is, if you do it before a bond matures)
Next, do you only pay taxes on the interest that the bond earned? Or, on the difference between the current value and the amount is cost to initially purchase the bond?

I know what the current values of the bonds are, but I do not know what the purchase-price was (I could find out, I'm sure).

We will not need any of them money for another year and a half or so -- but at that time we'd ideally like to use about 20% of the total funds to finish paying off our mortgage. The rest of the money we intend (for now) to leave in the bonds and use down the road for our child's college education.

I'm just trying to do some pre-planning, and want to understand as much about the vehicles as possible.
Thanks.
Post Tue Feb 21, 2012 2:29 pm
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oldguy
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quote:
My main question is how these bonds will be taxed if/when we decide to cash any of them out. Does the date that you cash them out make a difference? (that is, if you do it before a bond matures)
Next, do you only pay taxes on the interest that the bond earned? Or, on the difference between the current value and the amount is cost to initially purchase the bond?


Cabo - the bond 'basis' is their value at the time of inheritance. (So you're spared the pain of digging up the original prices.) You will be taxed on any gains/income after you inherited them, you pay income tax on the interest and capiatl gains tax on the increase in value. You can sell them at any time, they trade daily on the Bond Market (just like stocks), doesn't matter if they have matured or not. But if they mature, the value can no longer increase/decrese s they may be less desirable to you.

You mention 'child' - so you are probably young - in that case, bonds are not entirely appropriate for you, you are probably wnating to build wealth - so you would sell the bonds and purchase equities - ie, growth vehicles.

As for paying off your mortgage - probably a bad idea unless you have a high risk toxic-rate loan that you need to get rid of. If your loan is under 5.5%, you should be investing your capital in 8%, 10%, 12% products and buillding wealth. For your benefit run thru the math yourself - compare the total cost of a 30 yr loan with the value of a 30 yr index fund that earns 11%/yr - the power of compounding may surprise you.
Post Tue Feb 21, 2012 3:52 pm
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daoduchung304
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thanks you for sharing !!!!
Post Wed Apr 18, 2012 11:46 am
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lifesettlement
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quote:
Originally posted by oldguy
quote:
My main question is how these bonds will be taxed if/when we decide to cash any of them out. Does the date that you cash them out make a difference? (that is, if you do it before a bond matures)
Next, do you only pay taxes on the interest that the bond earned? Or, on the difference between the current value and the amount is cost to initially purchase the bond?


Cabo - the bond 'basis' is their value at the time of inheritance. (So you're spared the pain of digging up the original prices.) You will be taxed on any gains/income after you inherited them, you pay income tax on the interest and capiatl gains tax on the increase in value. You can sell them at any time, they trade daily on the Bond Market (just like stocks), doesn't matter if they have matured or not. But if they mature, the value can no longer increase/decrese s they may be less desirable to you.

You mention 'child' - so you are probably young - in that case, bonds are not entirely appropriate for you, you are probably wnating to build wealth - so you would sell the bonds and purchase equities - ie, growth vehicles.

As for paying off your mortgage - probably a bad idea unless you have a high risk toxic-rate loan that you need to get rid of. If your loan is under 5.5%, you should be investing your capital in 8%, 10%, 12% products and buillding wealth. For your benefit run thru the math yourself - compare the total cost of a 30 yr loan with the value of a 30 yr index fund that earns 11%/yr - the power of compounding may surprise you.


This is a great response, put your money to work for you. Rates are currently very low, depending on your circumstances, you may want to look into refinancing if it is applicable for your situation.
Post Tue Apr 24, 2012 5:48 am
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