Investing Tax Free

Municipal Bonds

What are municipal bonds?

Municipal bonds are bonds issued or backed by state and/or local governments to finance a variety of public improvement projects. When you invest in municipal bonds, you are loaning money to these issuers who in turn pay you a regular interest income. Your investment may help fund the building of a bridge that assists the flow of local traffic, a new school, or other enhancements to your community. Many investors see it as an incentive to buy municipal bonds, because they like the feeling of knowing that they contributed in some small way to the development of their community. Municipal bonds are sometimes called " muni " for short.

Tax free investing in Municipal Bonds

When people talk about investing tax free, they usually mean investing in municipal bonds. This is because Municipal bonds offer income exempt from federal income taxes, making them a powerful tool for maximizing your after-tax earnings. You can buy new municipal bond offering which tend to have better prices. 

There are many factors to consider when investing in municipal bonds such as municipal bond rates, municipal bond yields, maturity dates and types of municipal bonds such as General Obligation Bonds or Revenue Bonds. For investors looking for shorter term investments than municipal bonds, there are also municipal notes to consider. Let’s look at municipal bonds in depth.

Three types of entities are legally entitled to issue municipal bonds:
  • Territorial possessions of the US (US Virgin Islands, Puerto Rico, Guam)

  • State governments; and

  • Legally constituted taxing authorities (county and city governments, agencies created by these governments and authorities that supervise ports and mass transit systems, like port authorities and special districts).

Beyond their civic importance, however, municipal bonds can stand on their own as effective investment vehicles. Although municipal bond interest rates are usually lower than corporate bond interest rates, their safety and tax advantages sometimes surpass the benefits of other investment vehicles. Because they can offer substantial tax savings and a steady source of tax-free income, many investors see municipal bonds as the foundation of their portfolios, whatever their investment strategies.