1. FIN 352 - Professor Dow

2.  Basic Investing Principles:  Be diversified.  Hold a portfolio with the appropriate level of risk.  Asset allocation determines risk and expected return.  Tax laws can change the relative returns of different assets.  This might affect how you invest.

3.  Some types of income are taxed differently.  Some assets are taxed differently.  Some accounts are taxed differently.

4.  Capital gains vs. ordinary income.  Taxes on dividends.  Short-term vs. long-term capital gains.

5.  Mutual Funds  Municipal Bonds  Treasury Bonds

6.  Mutual Funds:  Mutual funds that realize capital gains through selling shares must distribute these gains (typically towards the end of the year).  Shareholders must pay taxes on these gains even if they did not sell any shares and the distributions are reinvested in the fund.

7.  Municipal Bonds:  Income from Municipal Bonds are exempt from Federal taxes and from state taxes if issued by that state.  Compare with similar corporate bonds by comparing after-tax yields.  Best for high-income (high-tax-rate) investors.

8.  Treasury Bonds:  Interest earned on Treasury bonds is exempt from state and local taxes.  Taxes still owed on capital gains.  Interest is not exempt from Federal taxes.

9.  Retirement Accounts  401k  Traditional IRA  Roth IRA  Other retirement accounts  Health and Education Accounts

10.  401(k)  Accounts are set up with employer.  Employer may contribute matching funds.  Individuals can contribute to their account each year with pre-tax money.  Taxes are not paid until the money is withdrawn.  Individually directed and can invest in most types of assets, although options may be limited by employer.  Limits on contributions plus various other restrictions.

11.  Traditional IRA:  Individuals can contribute to their account each year with before-tax money.  Taxes are not paid until the money is withdrawn.  Individually directed and can invest in most types of assets.  Limits on contributions along with various other restrictions.

12.  Roth IRA:  Contributions are made with after-tax dollars.  Income is not taxed.  Individually directed and can invest in most types of assets.  Limits on contributions along with various other restrictions.

13.  Roth vs. Traditional:  Roth is taxed now while a traditional IRA is taxed at retirement.  Since tax rates at retirement are usually lower than while working, this is an advantage for the traditional IRA.

14.  Roth vs. Traditional:  However, if you contribute the maximum, the Roth may be more valuable since the limit is in post-tax dollars.  There are other differences that can be important.

15.  The Asset Location Decision:  Determining what assets go in which account is called the asset location decision.  Ideally, assets generating income subject to the highest tax rate should go in tax-sheltered accounts.

16.  Tax laws can significantly affect your investment returns.  However, the rules can be complicated and can change each year, so be sure to do your homework.