Q. I’ve been thinking about muni bond funds to try to keep my income low enough to qualify for the new retiree tax break. My portfolio is more aggressive now with only 20 percent in bonds at all. Should I do munis?
A. We’re glad you’re considering taxes and doing your best to qualify for the new retiree tax break, but don’t let that tax tail wag the dog.
There’s a lot more to investing than taxes, and Thomas Geraghty, a certified financial planner and CPA/PFS with Stonegate Wealth Management in Oakland, said you shouldn’t let taxes determine your portfolio allocation.
We also don’t know enough about your personal situation, your investments and your goals — your investment policy statement — to properly analyze the retiree tax break question.
But here are some things you should consider.
Geraghty said you need to consider the differences between individual bonds and bond funds.
He said he doesn’t typically recommend bond funds for an entire bond allocation because of their interest rate sensitivity.
“A bond fund is holding hundreds — potentially thousands — of bonds, which results in greater interest rate risk,” he said. “As interest rates increase, bond values decrease. Interest rates are expected to increase in the coming years.”
He recommends you also look at the tax ramifications of rearranging your portfolio, and consider whether you’ll have existing gains that you’ll be recognizing in order to reallocate your portfolio.
Also, he said you should be sure to compare projected and actual dollar amounts rather than simply “munis vs. tax break.”
“What is worth more – the tax break or additional income from investments that suit your needs?” Geraghty said.
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