Is it time to switch my IRA form mutual funds to State exempt bonds or Bond fund market. 5 years to retirement

Question

Is it time to switch my IRA form mutual funds to State exempt bonds or Bond fund market. 5 years to retirement

Answer 1

You should have been doing that gradually as retirement got nearer instead of all at once.  So the answer is yes.  Move some to bonds.

Answer 2

Definitely not munis.  Not in an IRA.  This is a very very tough call to make. You are 5 years from retirement.  Bonds are paying a negative 3% for AAA rated. Why people are buying them I expect is because stocks are returning a negative 10%.  Inflation is going to be bad the next 5 years, I think.  It is bad now despite the government stats saying it isn't.  Convetional wisdom is that as you approach retirement you should re-allocate your investment more towards income producing investments to approach a 50-50 mix of bonds and equities.  This might be an exception to that rule since the Fed is giving money away for free.

If you are heavily into growth funds,  you might certainly think about moving towards income producing equity funds.  They certainly stand to hold up better in a down market and you do need to be thinking about protecting your assets from both a down market and from inflation.  The only bonds that might work are TIPs.  There is an ETF call TIP.  But only a small holding is all that should be considered, maybe 10% to 15%.   Among the safest equity funds would be ones that hold the so called blue chip stocks.  One that comes to mind is the index fund OEF which holds the top100 stocks of the S&P 500.  Pays 2.5% dividend. Another is IOO which holds the top 100 global stocks.  This actually hold many of the same stocks as OEF.    Pays 1.0% dividend.

Answer 3

I agree with gosh. The whole point of the IRA is to defer taxation - state exempt bonds pay low yields because they are also tax deferred. Very rich people buy state and muni bonds for tax purposes. If you have an IRA, you already don't pay taxes - buying any tax-deferred or exempt investment would be a waste of your tax shelter. You might as well have kept the money in a bank account. You've sacrificed liquidity by putting it in an IRA, so squeeze that out in the form of excess earnings by buying taxable vehicles.

Answer 4

Switch an IRA into State (tax) exempt bonds ----  No Way.  Your IRA is tax deferred and no matter what you invest it in, you pay taxes when you take the money out.  Why pay taxes on a tax free bond.  Invest in a conservative widely diversified bond mutual fund, like a short- or intermediate-term corporate fund from Vanguard.  Remember, even though you have 5 years until retirement, it doesn't mean you need all the money in 5 years, you still need some growth as you may live (need the income) for 30+ years.

If the word "switch" is a mistake, and you are over 59 1/2 and mean take out of the IRA and put it into a regular personal investment account, then if you are in a high tax state, a state exempt bond fund is a good choice.

Answer 5

Makes no sense to hold tax-exempt bonds within a retirement account since the tax-free advantage is lost.  If you want safety, buy U.S. Treasury bonds instead.  You should be gradually making your asset allocation more conservative as you approach retirement.

Answer 6

You might want to hold a bit on the switch to bonds. There are still some financial icebergs in the waters ahead of our economy. During a more obvious econmic rebound, then early in that move you might go to bonds (although that is also precisely when stocks will be taking off). Part of the idea is that mortgage and general credit woes need to be more obviously on the mend before putting your money into holding debt. Bonds are very good income vehicles when you don't have to worry that the issuing company is going to survive.

This is not exactly a safe time to be in either market but risk is part of the problem. Remember, if the equity can tank, so can the creditworthiness, but bonds get paid off first when a company liquidates.