Saturday, September
4 2010
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Saturday, September
4 2010
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Announcing a new acquisition!!
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What's New at Forte for the year 2009 April 2009 - Thinking About Munis? Make Sure You’re Making Wise Picks By Forte News Department Municipal bonds have
long been a safe haven for higher-income investors looking for safety and
greater tax efficiency. The credit squeeze put the municipal bond market
through its paces like other competing markets this year, but it may be time to
take a second look at both municipal bonds and muni bond funds. Let’s
start with a definition of what a municipal bond is. A municipal bond, or muni,
is a bond issued by a local government or their agencies to raise funds for a
host of reasons tied to keeping the government going. The potential issuers may include cities, counties, redevelopment
agencies, water and sewer projects, school districts, publicly owned airports,
seaports and other transportation entities.
They pay for everything from immediate government expenses to new roads
and various public projects. Municipal bonds come in two flavors—general
obligation bonds and revenue bonds. General obligation bonds are intended to
raise immediate capital to cover government expenses; revenue bonds are the ones
that fund infrastructure projects. As an incentive for
investors to buy these bonds, interest income is
often exempt from federal income tax as well as the income tax of the state in
which they are issued. Mutual funds
that invest in municipal bonds also offer the same tax treatment. This year
has held lots of excitement for muni investors and those who were hoping to be.
The credit crunch sucker-punched funding sources for public projects as well as
private investments–many municipalities ended up dropping certain projects
because investors weren’t there to buy the paper and other sources of financing
had dried up as well. Who’s fled the muni
market? Hedge funds, issuers of structured notes and municipal bond mutual
funds trying to keep up with redemptions from tapped-out investors. Right now,
the best source of demand for munis is individuals, who can account for only so
much business. But in the absence of other buyers, that’s potentially good news
for you. Keep in mind that even
during the Great Depression, no state defaulted on its general-obligation
bonds, and while some munis have defaulted, overall, such defaults are very,
very rare. So where’s
the opportunity for you? Look at some of the highly rated outstanding
bonds. You’ll find some amazing yields
that you certainly won’t find in CDs and other investments. Even though their
prices have plunged, some municipals late last year were offering long-term,
tax-free yields of five percent and above, which translate into the equivalent
of nearly seven percent for taxpayers in the 28 percent bracket and nearly
eight percent for someone in the top 35 percent bracket when the tax exemption
is considered. That’s a
very nice return relative to U.S. Treasuries, considered the safest investments
of all. But before
you buy, here are some things to know and steps to follow. Are munis right for you? The first call you make
shouldn’t be to a broker. It should be to your tax professional and your
financial adviser. A CERTIFIED
FINANCIAL PLANNER™ professional can take a look at
your entire taxable investment portfolio (there’s no point in putting
tax-exempt munis into tax-exempt accounts like IRAs or 401(k)s) and determine
whether they’re the right approach to take for your investments. What munis are in trouble? There are some governments who issued a hybrid
muni known as a variable-rate demand note. These were sold mainly to
institutions with maturities of up to 30 years that were paying at rates reset
as frequently as once a day. During the crisis, the rates on these notes have
shot up to double-digit territory, putting the municipalities that issued them
under particular strain due to short-term interest rates that can be reset as
frequently as once a day. Keep an eye peeled for the AMT: While most munis pay
interest that’s free from federal income taxes, some may pay rates that are
subject to the alternative minimum tax, known as the AMT. It’s a little more complicated than we have
space for here, but
this is absolutely why you need to talk to your tax professional or financial
planner before making a move into munis. Don’t forget to ladder: “Laddering” is a portfolio
structuring term. To ladder bonds means that you are buying them with
maturities occurring at regular intervals, so when they mature, you’ll have
money to reinvest at those same regular intervals. Watch those ratings: Yes, the main private
investment ratings firms–Moody’s and Standard & Poor’s among them–have been
in the doghouse for rating many battered investments highly, not just munis.
But most municipals rated AA or AAA are generally safe to consider. It’s also
important to check the issuer’s long-term ratings history. If they’ve been
consistently highly ranked over decades and the municipality has no financial
scandal (something that can be checked through news archives on the Internet),
that’s another good way to research a bond issuer before making a purchase. January 2009 — This column is
produced by the Financial Planning Association, the membership organization for
the financial planning community, and is provided by David W. Henion, CPA, a
local member of FPA. | ||||||||||||||
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