www.qns.com I LIC COURIER I SEPTEMBER 2017 43
TAX TIPS
Ginnie Mae Funds for
Your Retirement
BY JOHN SAVIGNANO, CPA
Many people prefer to have some
conservative holdings in their IRAs
and other retirement accounts. This
century has already produced two
nasty bear markets (in 2000 – 2002
and 2007 – 2009). If a third downturn
occurs, investors will be glad they
held some defensive positions, which
might minimize losses and possibly
offer gains.
When it comes to playing defense,
Ginnie Maes may merit consideration.
The nickname comes from the formal
name, Government National Mortgage
Association, or GNMA. This agency
promises investors the payment of
principal and interest from residential
mortgage loans insured or guaranteed
by federal entities, such as the Federal
Housing Authority and the Department
of Veterans Affairs. Ginnie Mae
mortgage bonds are the only mortgage
securities with full federal backing.
Ginnie Mae securities might be
considered the “safe option” for
retirement investing. Yields are not
enormous in today’s environment,
but they may be relatively attractive.
Typically, Ginnie Maes pay one to two
percentage points of yield more than
Treasuries. Why should supposedly safe
Ginnie Maes pay more?
One answer rests with mortgagebacked
securities. Most bonds lose
value when interest rates rise but gain
value when rates fall because their fixed
yields become more attractive.
Mortgage-backed securities,
including Ginnie Maes, also suffer
loses when rates rise. However, rising
rates can cause a slowdown in mortgage
pre-payments because borrowers are
less likely to refinance their loans. This
slowdown means that Ginnie Mae
investors have less money to reinvest
at higher yields.
The opposite phenomenon effects
mortgage securities when rates
fall. More refinancing occurs as
homeowners seek the lower loan rates.
That means more cash flow to investors
holding mortgage bonds and more
money to reinvest at lower rates. Thus,
mortgage-backed securities may lose
more than conventional bonds when
rates when rates rise and gain less when
rates fall.
Treasury securities and funds holding
them pay interest that’s taxable at the
federal level, but is generally exempt
from state and local income taxes.
Therefore, these holdings can be
especially attractive to investors in
high-tax areas.
Mortgage-backed securities, even
federally backed Ginnie Maes, do not
enjoy state or local tax exemption;
they’re fully taxable at all levels of
government. This relative disadvantage,
along with the complexity and interest
rate threats, may explain the higher
yields (verses Treasuries) that Ginnie
Mae offers to investors. Their tax
treatment also might cause Ginnie Maes
to be appealing holding in retirement
accounts where all the income taxes can
be deferred until money is withdrawn.
Investors can often purchase
individual Ginnie Mae bonds for
around $25,000. Some retirees are
pleased with these “pass-through”
securities because they deliver monthly
cash flow, reflecting the regular
payments made on the underlying
mortgages by homeowners. If you work
with a savvy financial adviser or if you
are willing to research Ginnie Maes on
your own, this can be an astute choice.
That said, the Ginnie Mae market is
complex, likely to lead to missteps by
novice investors. Many people prefer
owning shares of a fund and relying on
the expertise of professionals to choose
suitable Ginnie Maes. Diversification
and a lengthy time frame might
overcome interest rate concerns and
deliver the benefits of relatively high
yields. Many leading fund families,
including Vanguard, Fidelity and T.
Rowe Price, have established Ginnie
Mae mutual funds with performance
records for investors to evaluate.
In terms of performance, Ginnie Mae
funds generally had positive returns in
2008 when the stock market nosedived.
The past is no guarantee of future
results, but an encouraging track record
might indicate that Ginnie Mae may be
worth a place in a retirement portfolio.
John Savignano is a partner with
Savignano Accountants & Advisors
located at 47-46 Vernon Blvd.,
Second Floor, in Long Island City.
If you have any questions or require
additional information, please call
John at 718-707-0955.
