Dear Dr. Don,
I lost a lot of money in the crash. I have half of my money in munis and the other half in CDs I laddered out from 18 months to seven years. Unfortunately, the due dates are approaching and I don’t know what to do with the money. This is all I have and I have to focus on the safety of principal. I would appreciate some help.
— Lois Ladders

Dear Lois,
When you build a CD ladder, the answer to what you should do when a CD matures is easy. Presuming you don’t need the money, you use the proceeds to buy another CD at the longest maturity of your ladder — seven years, in this case.

It’s a little confusing why you split money between municipal bonds and CDs. The interest income from municipal bonds is free of federal income taxation and may be free of state and local income taxes as well, depending on your state of residence and the location of the bond issuer. CD interest is not tax-free income. It should either make sense for you to be in munis or sense for you to be in CDs. Talk to your tax professional about whether municipal securities are right for your portfolio.

The other question concerning the munis is the risk inherent in your municipal investments. State and local governments are in for a tough road ahead as they face declining tax revenues, the loss of federal stimulus money and increased pension pressures. Many municipal bonds are insured, but the capital adequacy of the insurers hasn’t really been tested yet.

Your insured CD is backed by the full faith and credit of the U.S. government. The backing of a municipal security depends on the type of bond, the viability of the project it funded, the taxing authority of the issuer and the value of any insurance policy issued on the bond.

You don’t say whether you’re in a municipal bond mutual fund or own individual securities, but at a minimum you would want to review the investment policy and holdings of the mutual fund, or the credit quality of your municipals.

Review your tax situation and the credit quality of your municipals. If you stay in the municipals, be proactive in monitoring the credit quality of your holdings. When in doubt, hire a fee-only financial planner to review your portfolio.

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