Tax Strategies: Other Tax-Advantaged Investments

Treasury Securities
Treasury securities, such as Treasury bills, notes, and bonds, are direct obligations of the U.S. government. Interest is exempt from state and local taxation. Treasury bills are generally available with 13-week, 26-week, and 52-week maturity periods; are non-coupon instruments; and are issued at a discount. Treasury notes range in maturity from periods of one to ten years, whereas Treasury bonds have maturities longer than ten years. Both Treasury bonds and notes pay interest every six months.

Treasury Inflation Protection Securities (TIPS)
TIPS are issued by the U.S. Treasury. The principal amount is increased for inflation (or decreased for deflation) by indexing it to the Consumer Price Index for all Urban Consumers. Although the interest rate is a fixed percentage, interest payments are based on the principal amount as adjusted for inflation (or deflation), causing the actual interest payments to vary. The amount of inflation-adjusted principal is subject to the original issue discount rules.

U.S. Agency Securities
U.S. agency securities, for the most part, are not direct obligations of the U.S. government. However, U.S. government agency securities are considered safe investments if held to maturity, because it is unlikely that the U.S. government would permit a U.S. agency to default on its debt obligations. Agency securities generally pay higher yields than U.S. Treasury obligations, and are typically considered to be on par with or better than AAA-rated corporate bonds. Below are some examples of tax-advantaged U.S. agency securities:

Tax Planning: Other Tax-Advantaged Investments Issuer Securities Taxability Federal Home Loan Bank Discount notes with maturities between one day and one year. Coupon notes with maturities greater than one year. State and local tax-exempt Student Loan Marketing Association (Sallie Mae) Discount notes with maturities between one day and one year. Coupon notes with maturities less than ten years. State and local tax-exempt U.S. Farm Credit System Discount notes with maturities less than one year. Coupon notes with maturities less than ten years. State and local tax-exempt

Note: The following are generally taxable at the state and local levels: Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac) pass-throughs, mortgage-backed securities, discount notes, and coupon issues.

Stripped Obligations
Stripped obligations are created by taking notes and bonds and separating the coupons from the principal. The coupons and principal are then sold as separate obligations. The following table shows the taxability of some of the more common stripped obligations. Contact your Prudential financial professional for a complete listing of available Treasuries, U.S. agency securities, and stripped obligations.

All stripped obligations are subject to the original issue discount rules that are discussed in the table below.

Tax Planning: Other Tax-Advantaged Investments Obligation Securities Taxability FICOs Stripped obligations of the Financing Corporation State and local tax-exempt REFCORPS Stripped obligations of the Resolution Funding Corporation State and local tax-exempt STRIPS/TINTS Stripped Treasury bonds State and local tax-exempt TIGRS/CATS Treasury bonds stripped by brokerage firms May be state and local tax-exempt1 TVAs Stripped obligations of the Tennessee Valley Authority State and local tax-exempt

¹Some states may treat these obligations as taxable. Consult your personal tax advisor regarding the taxability of these issues.