Municipal Bond Forum

FMSbonds, Inc.’s Municipal Bond Forum is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.

To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years, and other members of the firm as noted.

Postings are listed by date. If you have any questions, please call us at 1-800-FMS-BOND (1-800-367-2663) or e-mail us.

Using funds in a qualified plan to buy muni bonds

My husband and I are looking into investing in bonds to generate an income stream so we can build a retirement home and use the money to pay the mortgage. What tax implications are there for taking money out of a 401K or an IRA to invest in the bond market? We think that this might be the best way to go for us, but we have to look at the cost involved. Can you offer any information regarding this dilemma?

J.R., Arizona

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Mismanagement when bonds are called?

As a trustee of a non-profit organization and without financial background, I am frequently confused at the discussions about the $30 million portfolio. Are there any rules that would point to carelessness? Twenty years ago, I was told that if bonds are called on a regular basis, it indicates a lack of attention because we should be selling them before they are called. What should I look for to determine if our broker’s buy/sell recommendations are maximizing his commissions? If, for instance, we are investing $150,000, would it be better to buy one bond or three $50,000 bonds? I understand diversity is an issue, but are commissions and fees based on the total dollar amount or the number of bonds purchased?

P.H., Ohio

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Converting AMT bonds

Over the years, I’ve used the usual formulas of taking my federal tax bracket and the smaller correction for the state tax bracket in calculating the effective yield of a taxable interest investment and comparing the result with a non-taxable yield. In the past couple of years I’ve been subject to the Alternative Minimum Tax (AMT) and it appears that the effective interest earnings on bonds subject to AMT becomes significantly lower. Should these bonds be sold and replaced with non-AMTs or does the cost of selling and buying replacement non-AMT bonds result in a “wash”? This probably needs to consider the maturity of the AMT’s but I would appreciate your thoughts.

E.S., New Jersey

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Premium bonds

I will retire in about five years and would like to have some income and also be able to keep the feds from taking so much. What do you think? My wife and I have a joint annual income of about $115,000, which puts us in the 25% federal tax bracket. We paid about $2,500 last year in federal taxes. I would like to buy muni bonds, about $75,000 worth, with a maturity date of about 10 years. I don’t mind paying premium prices based upon your explanations in other responses I read. However, will premium prices paid exceed the money we will make from interest earned over a 10-year period of time? Are munis suitable for us? I saw under one of your links – “insure bonds” – there was a column representing coupon, yield to maturity and, finally, worst yield. What is the difference between coupon and yield to maturity?

S.W.

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Laddering if interest rates jump?

Regarding your articles about problems with laddering: have you considered that if interest rate jumps to 10%, your original investment of $500,000 will decline? The principle investment value will be much less than $535,000.

W.L., Maryland

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Barbell?

I have recently refinanced property I own that had $975,000 in equity. Now, after the refinance, I have about $480,000 left in equity and I will receive about $400,000 in cash. I’m 35 and already have $150,000 in the stock market (half of that is in my retirement accounts). My federal, state and local tax rate equals about 40%. I am not really interested in buying a place to live at this time. I am very interested in buying into the bond market, with two goals in mind: decreased tax liability and increased cash flow. I’m new to your site, so am only beginning to find out that you are the first source of information of the many I’ve consulted cautioning against a laddered municipal bond portfolio. But I wonder, what your thoughts are on a barbell portfolio? Or do you think it’s best simply to go for the highest yields within my comfort zone?

N.D., New York

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Muni bond investing at 70

Your Web site is full of excellent and useful information on investing in municipal bonds. However, I am 70 and retired (my wife is 68) and we need to produce about $35,000 per year in after-tax income from a muni-bond portfolio for the next five years and then have it adjusted to cover cost-of-living increases as they occur. I would hope to live to 90, or about 20 years from now, which would be my investment horizon. In my case, the use of 30-year bonds would not be feasible, (in 30 years I would be 100). Therefore, what is your strategy/opinion on investing in intermediate-term munis (20- year bonds) in our particular case?

R.S., Florida

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Virginia resident, California bond funds

I recently inherited some shares of two tax-free California bond funds. I am a Virginia resident but have a small amount of California income from a rental property there and therefore do file a non-resident California state return along with my Virginia return. Are these type of funds generally tax-free to in-state residents only? Is there a reason for a Virginia resident to hold California bonds? My inclination is to liquidate them, though I’d be interested in your thoughts.

S.B., Virginia

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New bond issues

I am unable to determine how I can purchase municipal bonds during the “initial offering period” when the purchase fees are paid to the initial seller. It appears that the brokers are now buying up the bonds for their own accounts and then selling them back to their clients at an additional fee. I consider this double dipping and taking unfair advantage of their clients! How do I prevent this? What system and procedure is necessary?

F.P., Arizona

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