Am I taxed on the Interest from Tax Exempt Bonds in my Rollover IRA

Rollover IRA, I have 20% of my money in Tax Exempt Bonds. Will I be taxed on this either a) if I convert it to a Roth IRA OR b) When I take money out during retirement.

In both a) and b) you will pay tax on this "exempt" income.

Yes. It is never a good idea to contribute or buy tax exempt assets in a tax-deferred account, as that converts them to TAXABLE assets. To add insult to injury, you will be taxed as ordinary income, not capital gains.

the market tanked. I would like to have some stability in this fund. I also have some high paying CD's.

You need to diversify further, with some equity assets (depending on your age and nearness to retirement) to take advantage of the inevitable recovery in the market. 90% in bonds or bond funds is unlikely to provide the growth you need.

"Never" is a harsh word, especially with the recent anomaly where tax free munis were paying more that treasuries.

Thanks,

I have about 20% of my assets in Individual Bonds (earning 5.5% + ) at this point, 20% in CD's (earning 5.5% +) and the rest in Stock & Bond Funds.

I am 40 years old, have about 220k in Rollover IRA.

"Never" may be harsh but I notice that Don didn't offer a specific set of facts in which, "It is never a good idea to contribute or buy tax exempt assets in a tax-deferred account," is incorrect.

In theory, if tax exempts were paying more than the pre-tax return on taxable bonds of the same risk then buying exempts wold be preferred. If, however, you see that in the relative pricing of taxable and exempt bonds then someone is miscalculating risk.