How to Invest $50-$5,000

In general, it slashes personal tax brackets and curtails a number of deductions and tax shelters, making it important to rethink your personal investment strategy.

In general, it slashes personal tax brackets and curtails a number of deductions and tax shelters, making it important to rethink your personal investment strategy. Lower tax brackets. The 1986 Tax Reform Bill reduced the number of tax brackets, generally lowering them for most investors. This means a larger portion of investment income can be retained, making investing more attractive. The highest rate prior to reform was 50%, but starting in 1988, there were two basic rates for most taxpayers: 15% and 28%. Capital gains taxed as ordinary income. The new law stipulated that all gains, whether long- or short-term, as well as any interest and dividends, are now taxed at the same rate as your salary. There is no longer a distinction between capital gains dividend or interest income. This means high-yielding stocks, such as utilities and corporate bonds, are more attractive. Municipal bonds remain attractive. Municipal bonds, which are tax-free, are one of the few tax-advantaged investments left. This means those municipals which are “triple tax-exempt” (free from federal, state, and local taxes) should be considered if you live in a state with high taxes.

With very few exceptions, every American should have an IRA, Keogh, or salary reduction plan, or, if possible, all three. Tax-advantaged retirement accounts. IRAs (Individual Retirement Accounts) and Keogh Plans are tax-advantaged accounts designed to help individuals save for retirement. The money in both accumulates tax-free interest or dividends until retirement. These may sound like stodgy ways to save, but the tax breaks offered by each of these three plans make saving very worthwhile; and fairly flexible rules provide a wide array of investment vehicles. Contribution limits and spousal accounts. Anyone who is working can put up to 100 percent of the first $2,000 he or she earns annually into an IRA every year. If both husband and wife are working, each can contribute $2,000 to separate accounts every year and take $4,000 off their joint income tax return. If one spouse does not work, then the working spouse can contribute up to $2,250. Investment options within IRAs and Keoghs. Whether you’re inclined to be conservative or speculative, there’s an investment program that’s right for your retirement plan. The various choices are explained in this chapter. These include bank CDs, mutual funds, brokerage houses, insurance companies, and zero-coupon bonds.

Yet for most of us, the local bank still seems the most logical holding spot for that first $50. Passbook and statement savings accounts. When you deposit $50 in a savings account at a commercial bank or S&L association,…