Munis and effect of pension funds on them and risks for portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Jackson12
Posts: 589
Joined: Tue Oct 06, 2015 9:44 pm

Munis and effect of pension funds on them and risks for portfolio

Postby Jackson12 » Wed Apr 19, 2017 11:31 am

We inherited munis whuch currently make up 1/3 of our portfolio. We intend to change our current investment allocation to one primarily matching a 3-4 fund portfolio. We want to transition to 40% ( or less) in equity index funds and the rest in bond funds, CDs, etc.

We are in our mid 60s and semi-retired ( taking a minimal draw from assets) but my spouse hopes to work full-time till 70. We currently use his take home pay to cover the majority of our expenses .

Our current concern is that we're not sure how to view the munis and if they have a place in our portfolio.

An advisor has reviewed our portfolio and suggested we might want to significantly decrease or sell our muni allocation because of the potential for increased municipal bankruptcies - due to the risk growing pension liabilities and their effect on munis (I believe munis were considered a significant factor in California and Michigan financial woes)

The munis served my parents well, at least for the purposes of their portfolio ( tax benefits) and were reliable. They have not served us as well as they did my parents.

I'm just not clear about why we'd want to keep many , if any, munis as we transition to a mix of index and bond index funds.

What advantages would we get from keeping them? . Our assets are currently almost 3 million ( not counting our house, which is worth roughly around $300,000 ).

Our taxes are extremely low because we put most of my spouses salary into pre-tax retirement savings, employer health insurance, FSA, etc. ...and because the returns in our current portfolio are awful ( thus the planned changes). .

Grt2bOutdoors
Posts: 16149
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Grt2bOutdoors » Wed Apr 19, 2017 11:35 am

Your advisor is painting the municipal market with too broad of a stroke. What specifically is the advisor saying that makes them a "bad fit" for your investment objectives? Is your advisor paid by AUM or fees or commission?

What types of municipal bonds do you own? Specifically, are they general obligation or project specific bonds, are they water utility bonds, toll roads, etc.? What are the current ratings of the bonds? Why do you say they are not benefiting you? Are you not receiving tax exempt interest income from those holdings?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

User avatar
Artsdoctor
Posts: 2677
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Artsdoctor » Wed Apr 19, 2017 11:41 am

Jackson,

Are you familiar with the EMMA site? It can give you recent prices and ratings of most munis.

First thing is first. Can you use the munis? Do the maturities match your needs? If no, then even highly rates individual munis may need to be sold because they don't fit into your investment plans.

Second, the probability of highly rated munis defaulting would be extremely small. Pensions, as well as other factors, are a concern that we've been dealing with for years, and it's something to keep your eye on. However, you need to put things in perspective. For example, a highly rated muni maturing in 2 years would not be something I'd worry about; bonds below A rating maturing in 10 years would be different story. I would guess that your munis would fall somewhere in between these extremes but perhaps not.

Third, you need to understand what it would take to sell your munis. Beware of the spread. You may pay dearly for selling your bonds. Since you inherited them, you need to be aware of any capital gain/loss implications as well.

Jackson12
Posts: 589
Joined: Tue Oct 06, 2015 9:44 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Jackson12 » Wed Apr 19, 2017 2:30 pm

Artsdoctor wrote:Jackson,

Are you familiar with the EMMA site? It can give you recent prices and ratings of most munis.

First thing is first. Can you use the munis? Do the maturities match your needs? If no, then even highly rates individual munis may need to be sold because they don't fit into your investment plans.

Second, the probability of highly rated munis defaulting would be extremely small. Pensions, as well as other factors, are a concern that we've been dealing with for years, and it's something to keep your eye on. However, you need to put things in perspective. For example, a highly rated muni maturing in 2 years would not be something I'd worry about; bonds below A rating maturing in 10 years would be different story. I would guess that your munis would fall somewhere in between these extremes but perhaps not.

Third, you need to understand what it would take to sell your munis. Beware of the spread. You may pay dearly for selling your bonds. Since you inherited them, you need to be aware of any capital gain/loss implications as well.


Thank you so much for responding .

As to your first point I am not sure how how the maturity date of the munis match our needs or how we can best use them - but I do appreciate their tax benefits. We've kept taxes to a minimum, partly because the munis as well as pre-tax contributions at work have helped keep our taxable income low. Unfortunately, Because we have not changed our individual equities to index funds we also have inadvertently kept taxes low there as well. No significant gains. Just paddling in place.

Being close to retirement, we are tilting towards holding a majority in conservative and relatively safe holdings.

However, we'll still need some equity exposure.

So what we need moving forward is to be able to take a 3% draw from our total portfolio in retirement and try to avoid invading the total portfolio principal any more than necessary.

The total gain for the muni part of the portfolio has been 3.12%. The majority of the munis were purchased in 2010 -2011. The last one matures in 2025. Of the years between now and 2025, the largest projected principal and interest distribution for the munis will be in 2019, for about $160,000 thst hear ( principal plus interest)

Munis in the portfolio have been maturing all along because there is approximately $112k in uninvested cash . we are not sure what to do with the munis as they mature...we do want tax advantages but how to integrate the munis with our overall plan? I'm sure I'm sounding very inarticulate here.

.
Second, you mentioned the EMMA site . I searched online and found it as the Electronic . Municipal Market Access site. I appreciate that heads up and have looked at the ratings for each fund. All but one are in the A range of ratings from Moody's and S&P

I need to research more to understand the difference between an AAA rating and other ratings such as A3 .

Most of the munis were purchased in 2010-2011. Of the 22 munis, the average remaining time to maturity is about 4 years. Nearly half mature by 2019, with 2 maturing as early as July.



.

User avatar
Artsdoctor
Posts: 2677
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Artsdoctor » Wed Apr 19, 2017 2:39 pm

Without getting into details, the concept would be this. You'd count the munis as part of your fixed income asset allocation, of course. When they mature, you'd spend them (if necessary) or take what you don't want and put them into your equity or bond funds, wherever they're needed most.

You're really not going to get into much trouble if most are maturing within the next two years unless they've really taken a hit from a credit-rating perspective. In order of highest credit rating: AAA > AA > A. You may have insured bonds and you may have pre-refunded bonds. Your cost basis of the bonds would be the value on the date of death; make sure you know how to amortize your premium bonds.

I would really urge you to consider taking a total return perspective when thinking about spending during your retirement years. Very few people would be living of interest and dividends alone, and spending some of those gains is nothing to be ashamed of.

User avatar
patrick013
Posts: 1508
Joined: Mon Jul 13, 2015 7:49 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby patrick013 » Wed Apr 19, 2017 3:04 pm

Jackson12 wrote:
The total gain for the muni part of the portfolio has been 3.12%. The majority of the munis were purchased in 2010 -2011. The last one matures in 2025. Of the years between now and 2025, the largest projected principal and interest distribution for the munis will be in 2019, for about $160,000 thst hear ( principal plus interest)



Without going thru each bond I'd sell the ones with gains based on your
tax basis. Select replacement bonds with 5 or 10 year maturities, I'd
prefer buying at a discount, with higher YTM's. Better bonds. Any doubt
do an after tax cash proforma thru the call date and compare that to the
selected replacement bonds. You'd probably be money and percentage
yield ahead in most cases. Now isn't a bad time to sell bonds at a gain.

CUSIP: 89453PUW7
CUSIP: 894435DH6

Here's a couple CUSIP'S, Schwab or Firstrade probably have them.
Or just keep what you have, especially the shorter term bonds.

Other options are a 5 year CD ladder or something like ticker BIV.
age in bonds, buy-and-hold, 10 year business cycle

wolf359
Posts: 978
Joined: Sun Mar 15, 2015 8:47 am

Re: Munis and effect of pension funds on them and risks for portfolio

Postby wolf359 » Wed Apr 19, 2017 3:26 pm

Jackson12 wrote:We are in our mid 60s and semi-retired ( taking a minimal draw from assets) but my spouse hopes to work full-time till 70. We currently use his take home pay to cover the majority of our expenses.


Our assets are currently almost 3 million ( not counting our house, which is worth roughly around $300,000 ).


Our taxes are extremely low because we put most of my spouses salary into pre-tax retirement savings, employer health insurance, FSA, etc. ...and because the returns in our current portfolio are awful ( thus the planned changes).


How much of your assets are in the pre-tax retirement savings?

As soon as your spouse hits 70 1/2, you're going to face Required Minimum Distributions from the retirement accounts. At that point, your income will start to climb.

Depending on how much, the tax-free municipals might start to look good.

If your retirement savings are high enough, you may want to start converting pre-tax funds into Roth funds. At the very least, convert enough (and pay additional tax) to top off your tax bracket. This starts moving some pre-tax funds out of that account, reducing your RMDs (and your future taxes.)

If you're doing that, you will want to let the municipals expire on their own, to minimize their impact on your income level.

User avatar
Artsdoctor
Posts: 2677
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Artsdoctor » Wed Apr 19, 2017 5:34 pm

patrick013 wrote:
Jackson12 wrote:
The total gain for the muni part of the portfolio has been 3.12%. The majority of the munis were purchased in 2010 -2011. The last one matures in 2025. Of the years between now and 2025, the largest projected principal and interest distribution for the munis will be in 2019, for about $160,000 thst hear ( principal plus interest)



Without going thru each bond I'd sell the ones with gains based on your
tax basis. Select replacement bonds with 5 or 10 year maturities, I'd
prefer buying at a discount, with higher YTM's. Better bonds. Any doubt
do an after tax cash proforma thru the call date and compare that to the
selected replacement bonds. You'd probably be money and percentage
yield ahead in most cases. Now isn't a bad time to sell bonds at a gain.

CUSIP: 89453PUW7
CUSIP: 894435DH6

Here's a couple CUSIP'S, Schwab or Firstrade probably have them.
Or just keep what you have, especially the shorter term bonds.

Other options are a 5 year CD ladder or something like ticker BIV.


Although it doesn't appear to be pertinent to the OP, it's important to understand that purchasing a muni bond at a discount is not advantageous from a tax point of view unless the discount is minimal ("de minimus"). If you purchase your muni at a significant discount and hold it until maturity, you're not going to pay capital gains on the difference between purchase price and par--you're going to pay regular income tax rates. I'm not sure why anyone would want to pay regular income tax rates when investing in munis.

http://www.investinginbonds.com/learnmo ... ubcatid=60

Jackson12
Posts: 589
Joined: Tue Oct 06, 2015 9:44 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Jackson12 » Wed Apr 19, 2017 8:07 pm

wolf359 wrote:
Jackson12 wrote:We are in our mid 60s and semi-retired ( taking a minimal draw from assets) but my spouse hopes to work full-time till 70. We currently use his take home pay to cover the majority of our expenses.


Our assets are currently almost 3 million ( not counting our house, which is worth roughly around $300,000 ).


Our taxes are extremely low because we put most of my spouses salary into pre-tax retirement savings, employer health insurance, FSA, etc. ...and because the returns in our current portfolio are awful ( thus the planned changes).


How much of your assets are in the pre-tax retirement savings?

As soon as your spouse hits 70 1/2, you're going to face Required Minimum Distributions from the retirement accounts. At that point, your income will start to climb.

Depending on how much, the tax-free municipals might start to look good.

If your retirement savings are high enough, you may want to start converting pre-tax funds into Roth funds. At the very least, convert enough (and pay additional tax) to top off your tax bracket. This starts moving some pre-tax funds out of that account, reducing your RMDs (and your future taxes.)

If you're doing that, you will want to let the municipals expire on their own, to minimize their impact on your income level.


wolf359 wrote:
Jackson12 wrote:We are in our mid 60s and semi-retired ( taking a minimal draw from assets) but my spouse hopes to work full-time till 70. We currently use his take home pay to cover the majority of our expenses.


Our assets are currently almost 3 million ( not counting our house, which is worth roughly around $300,000 ).


Our taxes are extremely low because we put most of my spouses salary into pre-tax retirement savings, employer health insurance, FSA, etc. ...and because the returns in our current portfolio are awful ( thus the planned changes).


How much of your assets are in the pre-tax retirement savings?

As soon as your spouse hits 70 1/2, you're going to face Required Minimum Distributions from the retirement accounts. At that point, your income will start to climb.

Depending on how much, the tax-free municipals might start to look good.

If your retirement savings are high enough, you may want to start converting pre-tax funds into Roth funds. At the very least, convert enough (and pay additional tax) to top off your tax bracket. This starts moving some pre-tax funds out of that account, reducing your RMDs (and your future taxes.)

If you're doing that, you will want to let the municipals expire on their own, to minimize their impact on your income level.


Probably too much info here

To answer your question, We have 11% of assets in the pre-tax retirement fund. $300,000

We have 30% in munis $800,000 - keep or not? Overall returns have been in the 3% range, varying widely for individual munis. Rated in the A range.

Our income should definitely start to climb in retirement - if Vanguard does significantly better for us than the relatively flat returns we've gotten with equities this year.

There will also be Social Security and the RMD from the retirement fund.


Here's what we have now from which we can take a draw but we keep it minimal, enough to not have assets go down and only enough to cover the gap between my husbands take home pay and our budget needs, which are $6560 a month. Reasons explained below. : . :


1. $800,000 in munis

2. $1,200,000 which is 30% equities and 60% bonds and conservatives . This account has stayed flat, never rising much but no significant losses ( except of course to inflation) So we're actually losing to inflation.

3. $400,000 in the same mix as account #2 - above


4. $200,000 in a money market at the highest interest we can get online ( may need this to help hold off Social Security till 70 and for living expenses if my spouse stops working.) There is a moderate chance my husband will stop working before age 70 due to moderate health issues which are not yet affecting his work. That could change quickly.,

6. 2,000 a month in taxable income from my spouses employment. He earns significantly more but we have been contributing well more than 1/2 in pre-tax contributions to his employer retirement plan ( with a match) , health insurance (co-pay plan with a generous employer match ) , FSA, vision and dental insurance.

Total- $2,624,000 -

I have not counted our house in our assets. It is worth $300,000 but if we sold and downsized we'd need to make some updates first and have no idea what the housing market would be doing. A sale could easily be a wash in the short term but we'd probably save money in the long term ( smaller house, smaller utility and other costs)

Our budget is $6560 a month (pre-tax). $2000 comes from my husband ( he makes about $55k but we throw what we can into the retirement fu d as well as pre-tax contributions to health insurance, FSA, dental, and vision insurance. Plus money comes out for Social Security,etc .

We had a federal tax refund this year and a small state tax payment . We have no debt. Cars are paid off, etc


Our retirement assets and taxes will be affected by whatever happens after we make changes and move to Vanguard, and decide what to do with the munis. We are about 5 years from retirement .

I'm not sure how to get an accurate figure for our retirement portfolio from which we will draw bit those assets will include :

1. Vanguard index funds : 3 or 4 fund portfolio We have an unknown future return and asset value because of the changes we are making - moving current assets to Equity index funds and bond index funds whuch are taking the place of our current asset allocation - moving to 37% equities, 63% bonds.

This does not currently allow for keeping the munis. That is an unknown. Advice appreciated.

2. We'll have the addition of RMDs from TIAA traditional - RMD of 10% a year at age 70 ( and (all the funds must be removed within 10 years) Those are the specific rules for TIAA Traditional.

3. Social Security- $2800 a month before taxes $28,800 annually

4. our Roth account - Unknown returns

5. Whatever the $200,000 in the money market has grown to, ( this is our back-up money in case my husband can't make it to 70 and remain employed at his current job. ) statistics are not in his favor and he has moderate health issues.

We currently take a 3% draw from assets and don't believe our monthly budget will decrease in retirement because:
1. We have a special needs son
2. We expect health insurance premiums to increase ( compared to premiums now)
3. We expect health costs to increase
4. We will not have all the pre- tax benefits we have now


[/color]

i am assuming at that point our j creased income mean we will no longer be getting tax refunds ( as we have this year and in previous years) I am unclear about what to do with the munis...both when they mature in the near and distant future as well as whether to keep the current 30% allocation in them.
Last edited by Jackson12 on Wed Apr 19, 2017 9:26 pm, edited 1 time in total.

User avatar
patrick013
Posts: 1508
Joined: Mon Jul 13, 2015 7:49 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby patrick013 » Wed Apr 19, 2017 8:53 pm

Artsdoctor wrote:purchasing a muni bond at a discount is not advantageous from a tax point of view unless the discount is minimal ("de minimus"). If you purchase your muni at a significant discount and hold it until maturity, you're not going to pay capital gains on the difference between purchase price and par--you're going to pay regular income tax rates.


You're absolutely right. Luckily, I think the 2 bonds I noted were less than
the threshold. Can't check somebody already bought them. Bonds less
than the threshold aren't hard to find. Thanks for the reminder.

If the de minimis threshold is not exceeded, the bond owner would not be subject
to the market discount rules. In such a case, however, the de minimis discount
would still be subject to capital gains taxation upon a sale or maturity.
age in bonds, buy-and-hold, 10 year business cycle

runner540
Posts: 138
Joined: Sun Feb 26, 2017 5:43 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby runner540 » Wed Apr 19, 2017 9:23 pm

"
2. $1,200,000 which is 30% equities and 60% bonds and conservatives . This account has stayed flat, never rising much but no significant losses ( except of course to inflation) So we're actually losing to inflation. "

I know the main question is about munis but this stood out to me, since the overall market has done very well the last 8 years. What are the holdings that comprise the $1.2 MM?

Gnirk
Posts: 616
Joined: Sun Sep 09, 2012 3:11 am
Location: Western Washington

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Gnirk » Wed Apr 19, 2017 9:57 pm

I, too, inherited Munis from my mother. They are all highly rated and pay 5% tax and AMT exempt. I use the interest for spending as I need it instead of selling my mutual funds. I hate to see them mature. As they mature, I invest the proceeds in Vanguard Intermediate Term Tax Exempt fund. I would like to replace them as they mature with individual munis, but the premium to buy highly rated munis now is just too high for me.

However, my situation may be different than yours. 90 % of my total portfolio is TAXABLE, so It holds only tax exempts for the bond portion,

stlutz
Posts: 3765
Joined: Fri Jan 02, 2009 1:08 am

Re: Munis and effect of pension funds on them and risks for portfolio

Postby stlutz » Wed Apr 19, 2017 10:02 pm

The standard and most likely appropriate approach in your case is to keep the bonds that mature in the relative near future and sell the one that mature in the distant future. "Near" and "distant" are somewhat arbitrary terms. For example, you may just keep everything that matures within 5 years and sell everything that matures after that.

If the bonds are callable this can be somewhat more complicated--we (meaning multiple people on the forum) can discuss how to approach that in further detail if you'd like to explore that.

Muni bonds are a safe investment but they are not as safe as a CD or a Treasury bond. The pension issue is one risk that should not be ignored, but it is one that can be exaggerated. If the advisor is focusing on this more than the question of whether munis are appropriate for you, and if so, which ones, then you're probably not getting great advice.

Other posters are trying to get a handle on the amount of tax-advantaged space you have as well as your expected tax bracket in retirement to assess whether munis make sense for you. If they don't, then you would probably be more aggressive in unloading them; if the are tax appropriate, then you should be more inclined to keep more of them as part of your fixed income allocation.

Jackson12
Posts: 589
Joined: Tue Oct 06, 2015 9:44 pm

Re: Munis and effect of pension funds on them and risks for port

Postby Jackson12 » Wed Apr 19, 2017 10:49 pm

runner540 wrote:"
2. $1,200,000 which is 30% equities and 60% bonds and conservatives . This account has stayed flat, never rising much but no significant losses ( except of course to inflation) So we're actually losing to inflation. "

I know the main question is about munis but this stood out to me, since the overall market has done very well the last 8 years. What are the holdings that comprise the $1.2 MM?


I actually gave very incorrect info about the $1.2 million dollar portfolio ( tax crunch, was tired) above. It has not remained flat.

The $1.2 account has had a total return for the last 9 years of 7.97%

The holdings in this account were selected,by an AUM manager,who is no longer the manager . We are switching to a whole different plan, reflecting the 3-4 fund Boglehead recommendations.

Meanwhile, the asset allocation is simply what the AUM selected.

One problem is that 17% is in cash ( I plan to change that within the month) One plus is that 15% of the assets are in the Vanguard 500 index Admiral fund and the total return there has been very superior.

The holdings in the rest of the account are all over the place, from the Schwab Fundamental US large company index fund (RSNYX, 9% of portfolio) to the Victory Global Natural Resources Fund, RSNYX ( 9% of portfolio , a negative return of 5.60 over the last 5 years. Morningstar has it rated as low returns and a 2 star rating.

There is even a Treasury bond ( due to mature in 2018) which has a current value of $58k .

Jackson12
Posts: 589
Joined: Tue Oct 06, 2015 9:44 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Jackson12 » Wed Apr 19, 2017 11:07 pm

Gnirk wrote:I, too, inherited Munis from my mother. They are all highly rated and pay 5% tax and AMT exempt. I use the interest for spending as I need it instead of selling my mutual funds. I hate to see them mature. As they mature, I invest the proceeds in Vanguard Intermediate Term Tax Exempt fund. I would like to replace them as they mature with individual munis, but the premium to buy highly rated munis now is just too high for me.

However, my situation may be different than yours. 90 % of my total portfolio is TAXABLE, so It holds only tax exempts for the bond portion,


The Vanguard Intermediare Term Tax Exempt Fund seems to have had better returns than my munis-in the 4% range compared to 2.09% return ( since inception) in my muni account. . I have held the munis for many years. The 3.12% return I listed above is not accurate.

The last of my munis will mature in 2025.

User avatar
Artsdoctor
Posts: 2677
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Artsdoctor » Thu Apr 20, 2017 9:34 am

Jackson,

It's still difficult to be able to recommend specifics, but there is definitely something to know about your inherited individual munis.

Remember that your Medicare premium is based on your modified adjusted gross income (MAGI). I don't know what sort of income you have, but muni interest is used to calculate the MAGI. If you might be relatively close to the breakpoints used to bump up your Medicare premiums, you need to know how to reduce that tax-exempt income.

If the munis are not from your state, you definitely have to amortize the premium bonds because you'd needlessly pay excessive state income tax on the full interest. But if the bonds are in your state, you'd still want to amortize those premium bonds in order to reduce the tax-exempt interest which is tallied in your MAGI.

There is a formula which is readily available online which will amortize the premium down to par. The date you'd use as your cost basis is the date which you inherited the bond (the date of death). The maturity date is either the first call date (if the bond is callable) or the maturity date (if the bond is not callable). I suspect that your bonds have high premiums because current rates are so low (the price of the bond increases as rates go down). Consequently, the amount of amortization of your inherited premium bonds may be substantial.

In looking back over your thread, I'm suspicious that your advisor may not be giving you the whole story. Yes, pension issues are things to consider with munis, but it's ridiculous that someone would basically throw the baby out with the bath water altogether. Selling individual munis can be costly, and it's possible that your advisor would benefit from those sales. So beware of his interests (sorry about the cynicism).

User avatar
patrick013
Posts: 1508
Joined: Mon Jul 13, 2015 7:49 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby patrick013 » Thu Apr 20, 2017 1:35 pm

Muni's to sell would be :
Short Term
Priced at a Premium
Taxable Gain
Low Yield to Maturity

Replacement Muni's would be :
Long Term
Higher Yield to Maturity
Priced close to Par (my personal preference)

I was looking at a Muni last night priced at 100, 13 years to maturity,
AAA rated, YTM = 3.0%. The bond was for a new county courthouse.

The VG Interm Muni Fund is probably the easiest solution
but replacing 3-4 year ST muni's with better LT muni's is quite common.
I'm not afraid of selling at a gain, paying a little tax, and buying
a 10-12 year muni when the muni's in my account are priced at high
premiums (110-120-even 130 sometimes). A state muni fund is
another excellent idea to avoid all state tax increasing return by
that amount on those muni's.

Best ideas I have if you have muni's at all. You said your taxes
are very low. Selling them at high premiums should increase
your return.
age in bonds, buy-and-hold, 10 year business cycle

Jackson12
Posts: 589
Joined: Tue Oct 06, 2015 9:44 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Jackson12 » Thu Apr 20, 2017 3:00 pm

Artsdoctor wrote:Jackson,

It's still difficult to be able to recommend specifics, but there is definitely something to know about your inherited individual munis.

Remember that your Medicare premium is based on your modified adjusted gross income (MAGI). I don't know what sort of income you have, but muni interest is used to calculate the MAGI. If you might be relatively close to the breakpoints used to bump up your Medicare premiums, you need to know how to reduce that tax-exempt income.

If the munis are not from your state, you definitely have to amortize the premium bonds because you'd needlessly pay excessive state income tax on the full interest. But if the bonds are in your state, you'd still want to amortize those premium bonds in order to reduce the tax-exempt interest which is tallied in your MAGI.

There is a formula which is readily available online which will amortize the premium down to par. The date you'd use as your cost basis is the date which you inherited the bond (the date of death). The maturity date is either the first call date (if the bond is callable) or the maturity date (if the bond is not callable). I suspect that your bonds have high premiums because current rates are so low (the price of the bond increases as rates go down). Consequently, the amount of amortization of your inherited premium bonds may be substantial.

In looking back over your thread, I'm suspicious that your advisor may not be giving you the whole story. Yes, pension issues are things to consider with munis, but it's ridiculous that someone would basically throw the baby out with the bath water altogether. Selling individual munis can be costly, and it's possible that your advisor would benefit from those sales. So beware of his interests (sorry about the cynicism).


Thank you so much for this additional information. I may have misrepresented my advisor's suggestion.

My advisor basically had a question mark about selling any munis and brought up the pension topic as an area to consider.

Based on your post I definitely need to research the possibilities, especially being close to retirement. As the munis mature, I'm not sure what to do next.

Jackson12
Posts: 589
Joined: Tue Oct 06, 2015 9:44 pm

Re: Munis and effect of pension funds on them and risks for portfolio

Postby Jackson12 » Thu Apr 20, 2017 3:02 pm

patrick013 wrote:Muni's to sell would be :
Short Term
Priced at a Premium
Taxable Gain
Low Yield to Maturity

Replacement Muni's would be :
Long Term
Higher Yield to Maturity
Priced close to Par (my personal preference)

I was looking at a Muni last night priced at 100, 13 years to maturity,
AAA rated, YTM = 3.0%. The bond was for a new county courthouse.

The VG Interm Muni Fund is probably the easiest solution
but replacing 3-4 year ST muni's with better LT muni's is quite common.
I'm not afraid of selling at a gain, paying a little tax, and buying
a 10-12 year muni when the muni's in my account are priced at high
premiums (110-120-even 130 sometimes). A state muni fund is
another excellent idea to avoid all state tax increasing return by
that amount on those muni's.

Best ideas I have if you have muni's at all. You said your taxes
are very low. Selling them at high premiums should increase
your return.


Thanks for your take on this. I have more to research now so I can increase my learning curve.


Return to “Investing - Help with Personal Investments”

Who is online

Users browsing this forum: aristotelian, bkweathe, cjcerny, enadroj, friar1610, goingup, GoldenFinch, Google [Bot], JuniorBH, JW-Retired, mjl5007, NancyABQ, pipefitter, rhoms33, SuzBanyan, Taylor Larimore, Traveller, wolf359 and 82 guests