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Show Investment income can still prove a tax deductible effort same, whereas that of a mutual fund may change from time to time. Remember that municipal bonds, funds and unit trusts, like all fixed-income investments, are vulnerable to changing interest rates. If rates rise after you buy a bond, mutual fund or unit trust, the value of your principal will decline. Conversely, if rates fall, your principal prin-cipal will be worth more. Hy CHARLES D. BAKER Financial Consultant You're probably one of millions of Americans who still pay a substantial sub-stantial portion of their income to Uncle Sam every year despite tax ,eform, and you probably know :li.:t it is now much more difficult to U '-p investment income out of the I US' grasp. Hut it's not impossible. For one iliing, many people can still take advantage of Individual Retirement Retire-ment Accounts, Keoghs and 401(k) plans, all ways in which earnings accumulate on a tax-deferred basis. (However, many people's IRA contributions are no longer tax-deductible from current income.) in-come.) Remember, though, that tax-deferred tax-deferred means exactly what it says: Your tax obligation is merely delayed until you withdraw, at which point you must pay at your then-current tax rate. And all government-sanctioned retirement plans have ceilings on the amounts y ou may contribute and penalties if you withdraw your money generally general-ly before age 59'2. Another tax-advantaged alterna-tive alterna-tive is municipal bonds, which have none of the limitations (maximums (max-imums or early withdrawal penalties) penal-ties) associated with tax-deferred accounts. Municipal bonds are the only securities where your investment invest-ment earnings are normally exempt from federal taxes. Your financial consultant can help you determine if you're in a high enough tax bracket to benefit from tax-free ir.unicipal returns. If you are, you then have three broad categories of municipal investments to choose liuni: Individual municipal bonds wc issued by state and local governments gov-ernments or governmental agencies, agen-cies, like power or highway authorities. author-ities. If the issuer is located in your home state, the income you receive will most likely be free from state and local taxes as well as federal; if you choose an out-of-state issuer, the iiuome will in most cases be free from federal taxes only. Municipal bonds are classified by independent rating services according to their safety from the risk of default. Top-quality bonds are rated AAA, AA and A by Standard Stan-dard & Poor's, while Moody's uses the designations Aaa, Aa and A. In general, the safer the bond, the lower the interest rate. Municipal bonds are sold with $1,000 face values, although most are issued in $5,000 denominations. Municipal bond mutual funds are large portfolios of municipal securities assembled and managed by experts. "Managed" means that the investment advisers buy and sell bonds regularly in an effort to improve the portfolio's performance. perform-ance. Bond funds may specialize in the bonds of one state, providing residents resi-dents of that state with double or triple-tax-free income, or they may contain a diversified mix of bonds from around the country. They may buy only the safest bonds, or they may opt for lower-rated issues that produce higher yields for investors. in-vestors. Your initial investment in most bond funds is only $1,000 (sometimes (some-times less), and subsequent investments invest-ments can be as low as $100. If you choose, your dividend income can be reinvested in fund shares ordinarily ordi-narily without a sales charge. The compounding effect of reinvested dividends will serve to increase your tax-free yield. In addition, shares of your municipal muni-cipal fund may be exchanged into other funds within the family, without with-out cost, should your needs or goals change. Municipal bond unit trusts are similar to mutual funds, in that they are diversified portfolios of bonds assembled by investment professionals, profes-sionals, with low initial and subsequent subse-quent investments and automatic interest reinvestment. They differ, however, in that they are not managed. man-aged. The bonds, once purchased by the sponsor, normally remain in the portfolio until maturity. This means that the interest rate paid by the unit trust will stay about the |