Stocks & Bonds

Benefits of Tax-Free Municipal Bonds

Municipal bonds should be like roses to a garden for the rich folk. However, they are not the only ones who can benefit from municipal bonds. Municipal bonds have a yield of 5.1%, and their taxable brothers have to carry a yield of at least 8% to equal the payout for people in the 36% tax bracket. Better yet, the gain on the municipal bonds is tax exempt.

Another good idea is to buy the municipal bonds from within your state. The advantage here is that this way the gain that is exempt from federal taxes will also be exempt from state taxes.

There are two ways to invest:

  • Buy municipal bonds from a broker or as shares in a mutual fund. By owning them directly, you are guaranteed the return of your principal as long as you own them long enough. The only catch is that you have to own a minimum value of $5000 in the bonds and at least $25,000 in investments to make a good gain on them.
  • The other way for those of us who cannot afford to fork over $25,000 for investing is to invest starting with a $1000 in a mutual fund. The only catch doing things this way is that you are not guaranteed the return of your principal.

Remember that the income gain on the municipal bonds is tax-free but when you cash them out, the capital gain you make on them is taxable.