Invest In Tax Free Municipal Bonds For Lower Taxes And Risk

How To Invest In Municipal Bonds

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When you hire an RIA, you should get written information that explains both the investment policy that applies to your account and the investment process used by the RIA. RIAs often combine purchases for several clients by trading in larger blocks to obtain a better price. Some advisers charge depending on the interest rate environment and the associated interest earnings. If you’re thinking about buying a municipal bond, the organization that regulates munis wants you to know that you have choices in how you do so. A helpful new resource from the Municipal Securities Rulemaking Board, or MSRB, lays out a number of ways you can participate in the municipal bond market.

  • This is an account held with a broker-dealer, and, like a full-service brokerage account, charges commissions, mark-ups and markdowns.
  • Yields for Texas General Obligation bonds are strong right now, often higher than the AAA-index, providing a prudent bond investment choice with an impressive return.
  • During an environment of low yields and economic uncertainty, municipal supply and demand have stabilized, demonstrating the resiliency of the underlying investments.
  • When you invest in munis, you basically lend money to state or local entities to use it toward expensive projects.
  • If you purchase a municipal bond in the secondary market at a discount to the revised issue price, you will have to pay tax on the difference when the bond is redeemed.
  • The price an investor pays for a municipal security will include a dealer’s fees for the transaction.

If rising interest rates cause the market value of bonds in the mutual fund portfolio to fall, some of those bonds will be sold—at a loss—both to limit further losses and to pay for share withdrawals. As a mutual fund shareholder, you are exposed to potential fluctuations in the mutual fund’s value. Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

However, make sure you do your research before investing to make sure you’re diversifying your portfolio appropriately. You may not be able to find an active market for your bonds, preventing you from selling them when you want at the price you’d expect.

Etfs For Risk Reduction In Your Portfolio

If they’re in line with your investment objectives, tax-exempt securities can be an excellent means of reducing taxable income. If you invested that same $100,000 in our municipal bond, you would receive $3,250 in annual income. For the Rockwell Collins bond — 3.7% interest on $100,000 gives you $3,700 in annual income.

RR only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. The content of this publication reflects the views of Retirement Researcher and sources deemed by RR to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Now, this doesn’t immediately disqualify munis as a great tool for retirement investors, but it does mean that you need to be careful about how you use them.

how to invest in municipal bonds

The state has reserves put aside for the proverbial rainy day, of which it has many, helping assure investors that its financial obligations will be met. If the yield from a municipal bond seems too good to be true, check the bond rating from Moody or S&P. Higher risk bonds, even as part of a diversified portfolio, can destroy the overall bond portfolio yield if any of the bonds default.

How Muni Bonds Work

Unfortunately, everyone else thinks so, too, which means that their prices reflect their tax advantages. For more information on municipal bonds, please contact your localEdward Jonesfinancial advisor. Franklin Templeton is one of the largest municipal managers in the nation. Over 30 tax-free strategies cover all geographies and the full credit quality spectrum and are available through mutual funds, ETFs and SMAs. With more than 40 years of municipal bond investing experience and a seasoned team of over 30 investment professionals, we have one of the largest and most tenured teams in the industry.

MMHYX has enjoyed more than $2.6 billion in net inflows over the past decade, however, bringing the fund to more than $5 billion in assets. The bigger the fund gets, the better access it should have to high-quality muni bond issues, which should in turn improve performance. Such transaction data and/or related information may not exist for all municipal securities and may not be required to be submitted to the MSRB for certain types of municipal securities transactions.

They’ll still want their cut, even though the bond is tax free at the federal level. Basically, buying a bond is extending a loan to a “borrower.” In the case of municipal bonds (also known as “muni bonds”), the borrower is a city, county, state or school district. The municipality borrows the money (usually a minimum of $5,000 and going up in increments of $5,000 from there), and the bond holder receives fixed payments from the city or state usually twice a year. Then, at the end of the loan term, the borrower pays back the principal. These bonds offer tax-exempt income and high credit quality, making them an option for income-oriented investors looking to reduce federal and, possibly, state income tax bills. Depending on the issuer, individual bonds may be difficult to sell prior to maturity, which may negatively impact the price received.

Find Municipal Bonds With Schwab Bondsource®

The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision.

Historical and real-time transaction price data, including information relating to a type of municipal bond called a “variable rate demand obligation” that resets its interest rate periodically. Investors should be aware that recent price information may not be available for bonds that do not trade frequently. Municipal Bond Defaults and Recoveries, 71 total defaults occurred over the period 1970–2011, including only five general obligation bond issuers. At the end of 2011 approximately 9,700 issuers were rated by Moody’s. In addition, under federal bankruptcy laws, a municipality must be specifically authorized by its state to file for protection, and the rules that govern a bankruptcy differ from state to state. In short, the risk-reward profile for munis and corporate bonds is different. If less risk is your priority, munis come out ahead; if better yields with higher risk suits you, corporate bonds get the nod.

Corporate Bond

Another question some investors might have is whether it makes sense to buy individual municipal bonds versus muni-bond funds. (In theory, anyway.) With a bond fund, by contrast, the value of your investment and even the fund’s yield can fluctuate, for better or for worse. Often tax-exempt securities are the most favorable for those in higher tax brackets, so it’s important to determine whether buying them would be an advantageous move for you.

how to invest in municipal bonds

Ally Invest does not provide tax advice and does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances.


The interest rate of a serial issue can also be different with each redemption date. As with some corporate bonds, many longer-term municipals may also include “call” provisions. Municipal bonds (also known as “munis”) are fixed-income investments that can provide higher after-tax returns than similar taxable corporate or government issues. In general, the interest paid on municipal issues is exempt from federal taxes and sometimes state and local taxes as well. Municipal bonds can offer a relatively safe, tax-advantaged way to diversify your fixed-income portfolio. While yields may not be as high as taxable bonds, the tax exemptions on interest earned can help even the playing field. Investors in high-tax brackets looking to diversify their taxable investment accounts may be best suited to municipal bond investing.

The secondary market is where you can buy bonds that are already issued from other investors, or sell not-yet-matured bonds you already hold. States, cities, counties, and other local governments, as well as enterprises that serve a public purpose, such as universities, hospitals, and utilities, issue municipal bonds. They usually pay interest that is exempt from federal income taxes. Interest may also be exempt from state income taxes if an issuer in your home state issues the bond. Another risk to be aware of is that many munis carry call provisions, which means the issuer may redeem the bonds early, even well before maturity.

The retail order period typically lasts a couple of days and levels the playing field between retail customers and large institutions. Munis, like Treasurys and corporates, may also experience price volatility.

Municipal Bond Investing

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity. Sometimes the IRS can be friendly to investors, particularly in the case of municipal bonds, which are exempt from federal income tax. If you buy bonds issued in your home state, you can expect the interest you earn to be exempt from state taxes as well. Interest income from municipal securities may be exempt from federal, state and local taxes, depending on where your corporation is domiciled. Interest income on Treasury securities is exempt from state and local income taxes.

Capital losses can be used without limit to reduce capital gains. A municipal bond purchased at a “market discount” may be subject to special rules and may generate income that is taxable at ordinary income rates. Since tax laws frequently change, consult with a tax lawyer or accountant for up-to-date advice. The majority of tax-exempt municipal securities are owned by individuals, mutual and money market funds, commercial banks, and property and casualty insurance companies.

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Option Two: Municipal Bond Funds

The fund may invest a significant part of its assets in municipal securities that finance similar types of projects, such as utilities, hospitals, higher education and transportation. A change that affects one project would likely affect all similar projects, thereby increasing market risk. By clicking on the fund name, you will be taken to a more detailed fund information page which includes main investments and risks. If you buy shares of a municipal bond fund that invests in bonds issued by other states, you will have to pay income tax. In addition, while some municipal bonds that are in the fund may not be subject to ordinary income tax, they may be subject to federal, state, or local alternative minimum tax. If you sell a tax-exempt bond fund at a profit, there are capital gains taxes to consider.

Most municipal notes and bonds are issued in minimum denominations of $5,000 or multiples of $5,000. Principal and interest are secured by the full faith and credit of the issuer, and are usually supported by either the issuer’s unlimited or limited taxing power. General obligation bonds often require voter approval in a referendum. Yield to maturity is the rate of return you receive by holding a bond until it matures.

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