Updated Tuesday, October 21, 2014 as of 2:33 PM ET

Investing Strategy: Individual Premium Bonds

There's only one investment recommendation that can make advisor Marilyn Bergen illustrate it to clients "with my arms out in the air like a teeter-totter," as she puts it.

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Comments (2)
It is confusing, if not misleading, to say "investors can take a tax-loss on the premium paid" for taxable premium bonds without making it VERY clear that this is not a tax loss but rather trading the deduction for amortized principal against taxable interest received for a subsequent tax loss. You only get a "tax loss" if you choose to pay income tax on the return of principal.

Yes, Mr. Fleming points that out later in the article but it is overshadowed by the "tax loss" which is hyped following the "Tax Benefits" header. He also points out that ordinary income tax rates can be higher than capital gains tax rates so you could end up paying higher taxes now for a "tax benefit" later when the bond is sold or matures.

This is not a tax benefit but merely recognition that the buyer is getting the premium he paid returned to him incrementally over life of the bond - otherwise he would be paying taxes on a return of his own money (i.e., principal repayment not interest). Playing this up as a "tax loss" is more of a sales gimmick than sound financial advice.
Posted by Kent G | Saturday, June 15 2013 at 7:55PM ET
I read your aricle with much interest as this is a very hot topic right now and on the surface the idea sounds promising. But after running the cash flow numbers I couldn't get past the big opportunity cost lost in your Torchmark/Georgia-Pacific example.

In the former bond you only made an initial investment of $105,000 but in the later you made an initial investment of $140,000. You don't address the "extra" $35,000 in principal difference. You could buy an additional $35,000 in Torchmark bonds bringing the net cash flow to $42,560 or you could buy a multi asset ETF (CVY) with a TTM of 5.15% and get a higher yield and some exposure to the equity markets as well as better diversification. In either case you would be better off not buying the higher premium bond.

I also think the the idea of buying callable bonds may work if you can control the trading and management fees but without knowing those costs I can't see how you are better off here as well.
Posted by GGrins | Wednesday, June 19 2013 at 1:19PM ET
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