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Arkansas Income Advantage: What to Know Thumbnail

Arkansas Income Advantage: What to Know

Insights Tax Planning

By Edward P. Mahaffy, MBA, CFP®, ChFC®

Many financial advisors give their clients exposure to municipal bonds through exchange-traded funds (ETFs). Although it’s easier for advisors, this approach may leave clients paying double advisory fees and unnecessary taxes. Through Arkansas Income Advantage, I offer clients a money-saving alternative with meaningful local impact.

Here’s a deep dive into what sets Arkansas Income Advantage apart. Learn how to tell whether this program is right for you.

Arkansas Income Advantage: A Quick Overview

Arkansas Income Advantage is a specialty financial service we offer. It involves building fully customized, tax-free bond portfolios made entirely of Arkansas municipal bonds like these:

  • School bonds
  • Capital improvement bonds
  • Hospital bonds
  • Water bonds
  • Sales tax bonds

Arkansas Income Advantage simultaneously helps our clients and communities. Income from these bonds is not subject to federal or state income taxes, and purchasing Arkansas municipal bonds also means your investment dollars stay in Arkansas.

Arkansas Income Advantage accounts typically generate steady returns. Most Arkansas municipal bonds have a coupon rate (the annual interest paid to you by the issuer) of 5.00%. For example, if you open an account with $1,200,000 and all bonds have a 5.00% coupon rate, you could earn $60,000 per year in interest.

To get started, you must have a minimum of $1 million to invest. While this portfolio includes all Arkansas bonds, we fully customize its contents so your portfolio aligns with your financial vision.

Cost Effectiveness and Tax Efficiency

When you’re investing, it’s virtually impossible to avoid fees altogether. However, some types of investments come with more fees than others.

For instance, municipal bond ETFs often include bonds from many states. Because the interest on bonds is not subject to federal income tax, these ETFs are a popular choice for those looking for income unencumbered by federal income taxes.

Unfortunately, Arkansas residents must pay state income taxes on interest from out-of-state bonds. This means that if you’re from Arkansas and have invested in a mutual fund ETF, you must pay income tax on dividends, and that tax can be as high as 7%. 

If you work with a financial advisor who outsources your investment, you also might be paying an advisory wrap fee. This is when your advisor “wraps” their fee around the fees charged by the fixed-income manager. Effectively, you end up paying two advisors for a single investment.

For many of my clients, Arkansas Income Advantage solves both issues:

  • When in-state residents invest in Arkansas municipal bonds, interest on those bonds isn’t taxed.
  • Because I build and manage each municipal bond portfolio directly, my clients don’t pay advisory wrap fees.

You might wonder why you can’t invest in an ETF made entirely of Arkansas bonds. While there are ETFs that include municipal bonds from only one state, state and city governments in Arkansas don’t generally issue enough bonds to support an ETF.

Support for Local Services and Infrastructure

Arkansas Income Advantage keeps your investment in-state. Here’s a brief rundown of how it works:

When you purchase an Arkansas municipal bond, you’re essentially lending money to the state government. Your investment dollars might help build a school, maintain state highways, or keep public services like water and electricity running.

In return for your investment, the government makes regular interest payments. Once your bond has matured, you’ll also be repaid the original principal amount.

Customized Management

Very few financial advisors have the depth of knowledge and experience to manage a municipal bond portfolio. That’s why so many go through ETFs. I have decades of experience managing municipal bond portfolios, and I’ve even written for Barron’s about the topic.

When you choose Arkansas Income Advantage, I take the time to get to know you and your goals. I can craft a personalized portfolio to help you avoid common municipal bond pitfalls and keep as much of your bond yields as possible. 

Want to Learn More About Arkansas Income Advantage?

At ClientFirst Wealth, Legacy & Estate Planning, we strive to meet your individual needs while helping you build a stronger financial future. If you’re interested in Arkansas Income Advantage or want to learn more about what we have to offer, don’t hesitate to contact us.

Reach out to me at (501) 603-0406 or ed@clientfirstwm.com and be sure to download a copy of my book, How to Select a Financial Advisor: The Least You Should Know.

About Edward P. Mahaffy, MBA, CFP®, ChFC®

Ed founded ClientFirst Wealth, Legacy & Estate Planning in 2007, after more than 23 years in the wealth management industry. Prior to launching ClientFirst, he spent 6 years as a portfolio manager and branch manager with Raymond James, 6 years as a vice president and portfolio manager with Merrill Lynch, and over 11 years as a financial advisor and fixed-income portfolio manager with Stephens, Inc. 

Designated as a Certified Financial Planner and Chartered Financial Consultant, Ed holds a Bachelor of Science in Business Administration from The Citadel and earned his MBA from the University of Arkansas. He is also a member of the Financial Planning Association (FPA). Ed has had articles published in The Arkansas Banker as well as Barron’s magazine and is a member of the National Association of Personal Financial Advisors (NAPFA). He is also the author of How to Select a Financial Advisor: The Least You Should Know. ClientFirst Wealth, Legacy & Estate Planning was recently named one of the 2020 Top Financial Advisor Firms in Arkansas list by investor.com. At ClientFirst, Ed is president and senior portfolio manager. 

Disclosures

The views expressed represent the opinions of ClientFirst Wealth, Legacy & Estate Planning, LLC (“ClientFirst”) and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Additional information, including management fees and expenses, is provided on ClientFirst’s Form ADV Part 2, which is available at https://adviserinfo.sec.gov/firm/summary/120286.

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