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Q

I am 63, my wife is 61 and we both work full time. In February 2009, we will receive approximately $250,000 from maturing CDs. Since we were just badly hammered by the Alternative Minimum Tax (AMT) for the first time on our 2007 taxes, I considered acquiring Virginia AMT-free municipal bonds next year with the CD proceeds. In view of our ages and probable retirement within five or six years, I assumed that acquiring bonds that mature in 10 years would be appropriate. I see that in the Forbes article, “Supercharged Munis,” you recommend putting $100,000 into four different tax-free bonds, though I’m not sure whether that should be divided among four bonds or that $100,000 should be put into each of four bonds. In any event, what do you suggest I do with an amount such as $250,000? If you suggest muni bonds, how many would provide adequate diversification and what maturities would you recommend?

A

James A. Klotz responds:

We believe that a $100,000 investment can be adequately diversified by purchasing four different issues of $25,000 each. We are not proponents of bond funds, since we believe municipal bonds should be purchased and held. There is no reason to pay the costs and management fees associated with these funds since bonds don’t need to be managed. As we said in the Forbes interview you cited, we recommend maximizing the investor’s tax-free income on every purchase. This means utilizing longer-term bonds, which provide maximum yield. We see no advantage in having your bonds come due three or four years after you retire, since there is no way to predict today what the reinvestment rate will be at that time.