Municipal Bond Forum

Why do you suppose investment specialists don’t recommend munis as an investment option? Do they think they’re only for the rich? I have been investing in tax-free bonds for 30 years and have done quite well in the process. When I was younger, I held my money in CDs. After a few years of paying additional income tax on the interest, I decided there must be a better way. I saw an ad in the business section of the paper and have never looked back.

J.E.

Our article, “Jobs Bill Misfires in Attack on Muni Bonds,” resonated, not surprisingly, with many investors. Here is a sample of comments from bondholders across the country. N.R. in Texas: “‘Not in my backyard’ and ‘I don’t want to get involved’ are cliches that resound with utter selfishness. If we are ever to stop the pain, pain-free parties need to suffer so that we are all on board to correct the malaise, not just the ones we like least or hate the most.” T.B. in Georgia: “If it is limited to those with more than $1 million in munis, it would hardly ripple the surface. Let the class war begin here!” F.S. in Florida: “Why is there is no chance of the bill passing when Democrats control the Senate and the president does not know what is good for the economy? Hopefully the country can get a new president.” B.T., Colorado: “Unfortunately, the government is going after anything and everything. As a muni investor for more than 30 years, I am glad you are speaking out.” M.M. in Missouri: “I have been waiting for the tax-free muni market to come under fire, but I don’t believe this will ever happen. It would be a disaster for states depending on money for infrastructure projects.”

Most of my munis are in Texas, where we have no state income tax. I do have bonds in Tennessee, Colorado, California and Wisconsin, which do collect state income taxes.  I need to know what the standard deduction is in each state so I know if I even need to file and how many more bonds I can reasonably own in each state without creating tax reporting tasks for myself.

D.T., Texas

I enjoyed your article, “Time Flew, But Interest Rates Didn’t.” We have a lot of money in muni bonds and certain inescapable basics keep coming back to me: Higher return is commensurate with greater risk. In this economy, we can’t get more than 1.5% on $1 million in cash, yet our munis continue to pay. I wonder, with state governments in tough shape, Fed money probably dried up and tax revenues down, is there a colossal muni default lurking? That’s what inhibits me, not interest rates, which, as they rise, signals the market’s acknowledgement of greater risk.

J.S., New Jersey

I volunteer for our group that assists deaf and hearing-impaired federal employees. Because we are non-profit, it seems we could get higher yields from taxable bonds. We pay neither federal nor state taxes and are incorporated in Maryland. Can you tell me which type of bonds we should be looking at?

B.H., Maryland

I do enjoy your occasional remarks about muni bonds very much. Having said that, what is the likelihood that muni bonds could lose their tax-free status?

A.S., Maine

Since my account contains only state and local issues, there should be no negative impact if Treasury bills get downgraded from AAA, correct?

M.B., Florida

In an article on laddering, it seems as though you favor buying longer-term bonds, as opposed to an initial purchase of a laddered portfolio. But then, years down the road, while continuing to add yearly, one will essentially have created a ladder, isn’t that right? Or is your article solely to compare a one-time purchase, and not a continually adding strategy? You stated that one investor felt the ladder was to avoid loss of principle, but as I understand it, the purpose of a ladder is to minimize interest rate risk, no?

D.M.

I’ve been buying municipal bonds from FMSbonds for the past few years. I was expecting no federal income tax on any of them and no state tax on the Arizona and Puerto Rico bonds. But I read recently that tax-free income from muni bonds causes more of social security income to be taxed. Will I end up with less after-tax income than I planned for because all of the muni income is not tax exempt from federal taxes (none of my bonds are AMT)? Does it affect the tax equivalent yield I use in my spreadsheet?

E.S., Arizona

The Washington, D.C. Council voted to, in effect, impose a new income tax of 8.5% on non-D.C. tax-exempt bonds, and to do so retroactively to Jan. 1, 2011. D.C. investors must now choose between just a few D.C. bonds (to remain exempt from D.C.’s income tax) or “out-of-state” bonds (to obtain diversification comparable to any state). What is your recommendation?

N.W.