My coworker (age 62+) goes on and on about municipal bonds, and gets dividend checks monthly from them.

I told him that they are for old people and I don't know anything about them (ha ha).

Does anyone here have them, like them, dislike them? I can't really see what's wrong with them as far as using them as a post-tax shelter type of thing. I am considering doing the IRA/Roth Conversion and with that money putting it in municipal bonds. Considering I'll have to pay taxes on the IRA money that I have from doing the conversion, would it be a bad idea?

Absolutely horrible idea. Sorry to be so blunt, but its a reflection of how bad an idea that is.

You should never own municipal bonds in a Roth or Traditional IRA. They pay interest that is tax free. Since you don't pay tax on income in the IRA you are wasting the tax free interest feature of the muni bond.

Also, I'm not sure what the IRA conversion has to do with this.

Adding to what bill_o said, bonds, and especially government ones like munis, stand to lose a large proportion of their value as soon as interest rates increase.

Your friend the old-timer probably owns municipal bonds from the good-old-days, e.g. they were issued when interest rates were high, and therefore are still paying out pretty well and even increasing in value apart from dividend payments. Still, YOU can't get those bonds, and when interest rates increase again, your friend the old-timer will also see a hit to the market value of his bonds.

Long story short: It's really the wrong time for bonds. Honestly, with an investing time horizon of 5-10 years, you're safer investing in index funds.

There is another reason not to pour all your money into munis, diversification. You'll have to buy munis in the state you live, so you don't want to be solely in munis for your state. If you live in California, this should be really obvious.

Also, I wouldn't avoid ALL bonds solely b/c of interest rate risk. Bonds can play an important role in people's portfolio by reducing volatility and slightly reducing returns. This is achieved with re-balancing. I have heard the interest rate risk tale for the last 4 years, and the bottom line is, if you were on the sidelines, you lost out. Bernanke or whatever his name is has promised to keep interest rates low until 2014. There are also redemption features of bonds which can help protect the bond holder from interest rate risk, they can be convertible to stocks or puttable.

I had a response all typed out this morning, and it didn't go through.

I currently max my Roth, so I'm looking for something to put in my portfolio for after tax earnings but with a gain as well. My savings account/CDs aren't cutting the mustard, and I'm willing to take a bit more of a risk, but not TOO much. I have other things for that.

I brought up the conversion as a way to get rid of some of my pre-tax stockpile and pay taxes now and be done with it. I have earned quite a bit of money from my 401k/IRA investments, and I don't want all my money in the pre-tax pile anymore.

So this is what I want. Something that earns me more than a CD/Bank account, slight accessibility if need be, and something post tax. Suggestions?

And to Bichon, I wouldn't be putting all of my money in munis, this is just one pile of money.

While this is generally true, the specifics make all the difference.

If you buy a municipal bond and hold it to maturity then there is no direct interest rate risk. The risk is in owning a muni bond fund. In that case you can look at the duration and know how much the price will decline if rates rise. A typical muni fund at one of the firms usually mentioned here has duration of less than 5 years. If rates rise like crazy to their historical norm they will go up about 2%. The Fed is saying that will not happen for at least 2 years. If anything the Fed is trying to figure out how to push real rates further down. But if they do rise back to the norm over 2 years then those muni funds will go down about 10% over the next few years. My index funds lost almost that much in May! So saying you will lose a "large proportion" of your investment is an exaggeration.

I have always avoided muni funds for a different reason - they market supposedly prices them so that they pay the same yield as corporate bonds after adjusting for taxes in the highest tax bracket. That's the theory at least. But over the last decade the actual result has been that they have yielded the same as equivalent taxable bonds for people in about a 20-25% tax bracket. Since we are in a higher bracket we have started buying muni bond funds with some of our bond investments because the math seems to make sense.

I agree that right now is not a good time for bonds. But our reason has to do with allocation not timing.

I also agree that munis should never, ever be put in an IRA or Roth and also don't see how the conversion has anything to do with this.

So, are you willing to go up the yield curve? Or do you need the security a CD bank account offers? It sounds like you are either reaching for yield of starting taxable investments.

We don't have the full story, but I would advise against reaching for yield if that is what you are truly doing here. There are ways to keep your money safe and get (marginally) higher returns. 1) Invest everything in 5 yr CD's with a low penalty for early redemption. Ally bank is who I use. I keep a couple grand around for small emergencies, but everything else is in 5 yr CD's or 2) i-bonds. I-bonds must be held for a year before redemption.

If looking to get started with taxable investments, You'll get beat up on taxes investing in bonds. See this article about tax efficient investment placement. http://www.bogleheads.org/wiki/Principl ... _Placement

As our taxable investments gets bigger, we also keep less in an emergency fund. For instance, if we want a $30k emergency fund, we are happy having $5k in emergency fund and $100k in the market. Just as a hypothetical example.

Hope this helps!

Thanks Bichon. That article explains a lot, and when I read it more thoroughly, I'll have a better idea of what I should do, I hope.

5 year CD rates aren't that great either, that is why I'm hesitant to put my money in them. I will look at i bonds as well.

I don't understand what you mean by I'll get beat up on taxes by investing in bonds. Even if I buy bonds with my after tax money? Can you explain that to me?

When I say 'slight accessibility', I want to be able to take the money out without getting screwed on taxes. I have an emergency fund already, and this money would be 'get away/start a business/move out of the country/buy a summer house money' in case I ever need it. Right now, I don't need it, but I don't want it sitting around earning nothing in the meantime.

There are two issues at play here, are you upset with the current yields of savings accounts? If so, take a number. But it is important to keep money earmarked for certain risk within that risk category. You should accept whatever yield the market bears for that risk tolerance. 5 yr CD's aren't that bad considering the alternative. I locked in 2.65% APY last summer and I only forgo the last 2 months' interest if I decide to get out of them. I wouldn't buy I-bonds right now, I would wait until the CPI-U numbers come out in October (I think that is the magic month) and see if you should wait to buy until the end of Nov. You always buy i-bonds at the end of the month (at least smart people do), b/c they still record at the 1st of the month you buy, so you effectively get a free month's of interest. The yield on my ibonds right now is 3.06%, then it goes to 2.2% for the following 6 months. We'll see what October brings....and taxes on i-bonds are deferred until redemption.

But, it seems you are more in to starting the taxable investments. Holding bonds in a taxable account will leave you with a bigger tax bill. You need to look at ALL of your accounts as a whole. If you need help putting together a portfolio, I would start a boglehead's account and ask in the sub-forum specific to this very issue. I would also be sure to READ and FOLLOW the very specific directions they have. If you do so, you should get some very helpful replies. Also, make sure you read and understand the wiki, people are helpful there, but they tire of people lazily coming in and asking them to do all the work.

Thanks. I don't mind doing some work to figure out how to allocate my money, so that's no problem. I really appreciate your helpful comments.

I asked here because I didn't really know where to start, and since I frequent these forums, why not start at home? hee hee.

no problem. I'm actually not a member over at bogleheads. It's the best place to go for a free portfolio critique imo. Good luck.