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Municipal Bonds

If I had to make a list of things I hate the most I'd probably include racism, disease, war, and taxes. Okay, maybe I'd leave taxes off the list since they are used for some noble things but, as an investor, they're something I don't look forward to paying every year. But the good news is that there's an investment that lets you get around paying them...the municipal bond.

A municipal bond is basically a bond issued by a state, city, or county in order to pay for projects such as highways, schools, and hospitals. When you buy a municipal bond, the issuer is basically saying "if you give me X amount of dollars, I will pay you interest on it and will then repay it in full later".

Municipal bonds are typically exempt from federal income taxes but are usually only exempt from state taxes if you reside in the state of an issued bond. For example, if you lived in Los Angeles and bought a San Francisco municipal bond, you would probably not have to pay state or federal income taxes. Although municipal bonds may be exempt from many forms of taxation, they aren't exempt from all of them. Bondholders might have to pay taxes if they sold the bond for a gain in a secondary market before it matured. For example, if I bought a bond for $5,000 and found someone else who wanted to buy it from me for $5,500 then I would have $500 in taxable gains.

Investing in municipal bonds isn't always easy and they are often only issued in $5,000 increments so if you want to invest in them without the work of having to research them, you would probably want to find a municipal bond mutual fund.

Municipal bonds aren't really investments for kids because since we're younger, we have more time to accumulate our savings and can afford to take a little more risk. However, if you are in a high tax bracket and wish to lower your tax bill, municipal bonds might be a good investment for you.


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