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Your message (“The No. 1 Sin of Muni Investing”) is right on. My friends always ask me why I hold long paper. I tell them I have consistent returns of 5.00% and no worries.
- S.D., Florida
As you know, we have always encouraged municipal bond investors to buy long-term bonds to maximize their income and avoid the flawed strategy of laddering.
Investors with shorter-term laddered portfolios have experienced the frustration of continually being forced to reinvest at lower and lower rates for the last few decades. As a result, they have sacrificed 40% to 50% of available tax-free income on each purchase. Also lost are the additional dollars available for reinvestment.
I trust that a quick glance at your portfolio will change your friends' approach to muni investing.
It’s my understanding that under the new tax rules, those in higher brackets may get hit twice on “tax-free" income. If modified adjusted gross income rises above $200,000 for a single filing taxpayer, a 3.8% surtax is imposed on all investment income, regardless of source
- R.C Illinois
I'm afraid we differ on both counts.
According to our tax professionals, your tax-free income is not included in the calculation of the Affordable Care Act’s 3.80% surcharge.
Additionally, your tax-free income does not become taxable regardless of how substantial it may be, as long as you are filing by the conventional method, rather than the Alternative Minimum Tax (AMT) method.
Please consult your tax professional regarding your specific situation.
If I buy only insured muni bonds, do I still need to be concerned with the bonds' rating?
- G.E., Louisiana
As an investor, you should always be the one who determines the degree of security you are comfortable with, based on your personal risk tolerance.
As you know, most "investment-grade" rated municipal bonds provide an adequate degree of security, as evidenced by their very low default rate.
Insurance provides an additional layer of credit quality, but it is always prudent to evaluate the underlying security.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.