Toby Gottfried (re buying TIPS for Your IRA at the October 10 Auction): ‘Vanguard will do it for $25. Here’s their commission schedule.’

☞ Of course, your IRA has to be with Vanguard for this to work. Certainly not worth trying to switch it from Fidelity just to save $25.

Bruce Barton: ‘I will be taking out a home equity line of credit to remodel my kitchen and bathroom (which sorely need it). The cost of remodeling should be around $30,000. My line of credit will be around $50,000. The interest rate quoted is Prime (around 6.75%, I believe). Does it make sense to take the full $50,000 and invest the remaining $20,000 in a good municipal bond fund for which I would not have to pay any taxes? I figure that the rate owed on the loan would be under 4% (after tax deductions for the home equity line of credit), and if I could get 5 – 6% (or more) on a muni fund, I would be ahead of the game. Could this work?’

☞ No. In the first place, the IRS disallows the interest deduction on a loan taken to buy tax-free bonds. In the second place, even if you were not caught and fined and beheaded, the spread you would realize between the after-tax cost of borrowing and the income from the bond fund would amount to very little on $20,000. And in the third, if the prime rate goes up, your interest payments on your home equity loan would rise but not – unless it were a low-yielding short-term municipal-bond fund – your tax-free income. So what had started out as a small positive spread could turn into a negative one.

Don’t miss Paul Krugman in yesterday’s New York Times. That nice fiscal prudence we had developed over the last several years? With its nice balance between great times for the best-off but not such bad times for the working poor? And the hope of more resources for education and a good prescription drug plan for seniors? This administration has different priorities.


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