Buying municipal bonds for retirement? Beware of this predicament. | Smart Change: Personal Finance
(Morri Bachmann)
During your working years, it is a good idea to invest heavily in stocks, as this can lead to strong and steady growth in your portfolio. But as retirement approaches, it’s smarter to switch to safer investments, like bonds.
Bonds don’t tend to be as volatile as stocks, so at a time when you may need to tap into your investments for income, they’re a good bet. And if you’re going to buy bonds, you may want to focus on municipal bonds (or municipal bonds) over corporate bonds.
Corporate bonds tend to yield higher yields than municipal bonds. But municipal bonds have some distinct advantages. First, the interest income they pay is always tax-deductible at the federal level. And if you buy money bonds issued by your country of residence, you can also avoid state and local taxes.
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Also, historically, municipal bonds tend to have lower default rates than corporate bonds. This means they can be a safer bet for your retirement portfolio.
But while muni bonds certainly have their advantages, there is one issue you should be aware of if you are going to hold them during retirement. Otherwise, your financial plans may be derailed.
Can your municipal bond interest lead to taxable Social Security benefits?
Seniors who get all or most of their income from Social Security can avoid taxes on their benefits. But once your retirement income exceeds a certain threshold, taxes on Social Security benefits will take effect.
Meanwhile, the formula used to determine whether your benefits will be taxed includes the interest income you receive from municipal bonds. So even though these same payments may be tax deductible, they may result in your Social Security income being taxed.
You may also get stuck with higher health insurance premiums
Each year, there are standard payments for Medicare Part B enrollees. But those with higher incomes are usually subject to additional fees on their Medicare premiums. And if you receive interest income from money bonds, it will be factored into the formula used to determine whether the Medicare Premium Fee applies to you.
Furthermore, it is not limited to Medicare Part B where these additional fees apply. You may get stuck with an additional cost on your Part D premiums and also if your total income exceeds a certain threshold.
Be careful with Bond Money
Mooney bonds are a very suitable investment for seniors across different income levels. But you may want to consult with an accountant or financial planner if you are concerned that the interest they pay will push you into a high enough bracket to pay the additional fees on your Medicare premiums.
However, paying taxes on your Social Security benefits is a different story. The income limits to which these taxes apply are very low, so staying below these limits means limiting yourself to very little money to live on.
As such, the Social Security issue should be less important than the Medicare issue. But both are worth putting on your radar if you plan to hold a money bond during your graduate years.
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