Your Questions About A Municipal Bond Fund

Betty asks…

Do municipal bonds increase MAGI?

I am looking to invest in a municipal bond fund. My major concern is trying keep both my AGI and more specifically my MAGI to remain eligible for ROTH IRAs and Passive Income losses.

Edward answers:

The MAGI calculations for your Roth are not affected by non-taxable interest on municipal bonds. Ditto for passive losses.

Maria asks…

Is my fidelity Money Market Mutual Fund safe?

This is what it invests in:
Primarily invests in U.S. dollar-denominated money market securities and repurchase agreements for those securities. The fund may also enter into reverse repurchase agreements. The fund also invests more than 25% of its assets in the financial services industry. An investment in this portfolio is not guaranteed or insured by the FDIC or any other government agency. Although this money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in this fund. Yield will vary.

I have my entire 401k in this account and I’m wondering if its safe in today’s market. I’d like to put it into a municipal bond fund that is tax free, but its not available in my 401k. Should I roll it over into an IRA and if so what are the pros and cons to rolling over?
Any suggestions would be greatly appreciated.

Edward answers:

You’re fine in Fidelity’s money market fund. Here are some reasons:
1. They’ve been conservative with their holdings and have chosen to sacrifice yield (interest) for safety — a good sign of prudent management.
2. They don’t have any exposure to Lehman debt, and only miniscule exposure to other problem companies like Merrill Lynch and AIG.
3. Money market funds are Fidelity’s bread and butter, so they have a lot more to lose than you if they let one of their MM funds “break the buck.”
4. Fidelity also has the financial means to back up their MM funds should they run into any short-term problems.

The link below has some more detail on their taxable MM funds, much of which also applies to their MM funds for tax-deferred accounts, such as your 401k account.

Two more notes:
A. You don’t have a municipal bond fund in your 401k because 401k accounts are “tax-deferred” accounts and cannot take advantage of the tax benefits that muni bonds provide.

B. Sitting on cash is fine for now, but develop an investment plan and don’t sit on that cash forever. Inflation will eventually catch up with you and pass you by. Good luck!

Jenny asks…

Bond capital loss question?

I previously owned shares of a municipal bond fund (PMO: Putnam Municipal Trust) that now amount to a small loss after I liquidated the shares. Can I still use those shares towards a Capital Loss on my taxes even though they are tax exempt?

Any details and/or hyperlinks to IRS publications would be a tremendous help. I looked through IRS Publication 550 and found nothing.

Edward answers:

The loss is deductible.

Publication 544 –

Section 2 (Ordinary or Capital Gain or Loss) under Capital Assets, and you would see capital assets include bonds.

Joseph asks…

Is it safe to invest in municipal fund?

I’m thinking of taking a large portion of my savings in a fund that invests in AAA/AA municipal bonds. During these times of high government debts and uncertainty (such as California), is this still a safe enough bet?

Edward answers:

Assuming the company running the fund has been around and running similar funds for several decades, I think such a fund would be safe enough for most people to put a significant amount of their portfolio into. By a significant amount I am talking about something around 20%, not 80%.

Municipal bonds are still considered one of the safer investments, particularly when you go for higher rated bonds and diversify through a fund.

Of course, this is just my opinion.

Ken asks…

Ideal Portfolio for Conservative Investor Oct/Nov 2009?

I’ve always been a conservative investor, almost paranoid of the stock market. I’ve seen many recent alternative strategies about Bond Funds, International Bond Funds, Municipal Funds, REIT’s and the like. I wouldn’t mind some stock (but low percentage of total portfolio). Can you recommend a DREAM Portfolio based on the current economy and 12 month forecast starting with November of 2009? Thank you! P.S. Prefer to stay away from funds with high loads, high fees and so forth.

Edward answers:

Financials, Property Developers, Oil companies- They should be some of the best market performers in the next 12 months.

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