Tax Free Municipal Bonds

The stock market is still recovering so where should you invest your money? What investments offer stability?

As you are bound to know, safe returns come with a relative reduction in potential financial gain. But perhaps the time is right for you to make such an investment.

If so, it may be time to consider tax free municipal bonds. These offer a modest income that is free from taxation.

What are they, I hear you ask. Municipal bonds are debt securities that are issued by a state or local government or government entity. The money raised by these securities is used to build roads, schools and parks. So, when you purchase a municipal bond, you are in effect lending the value of the bond to your state. They pay you interest on this loan.

If you are a resident of the state issuing the bond, there is even more good news. This interest will most likely be free from taxes, federal, state and local. Check this with a tax professional in advance as there are some instances were taxes can be levied.

There are three basic types of municipal bonds. There's the general obligation bond, which is backed by full faith and credit of the issuing agency, in the form of the municipality's taxing power. Secondly, there is the revenue bond, which is backed by the money made by a specific project, authority or agency. These bonds are in effect only as good as the specific projects they support.

Thirdly, there is the industrial development bond. This is issued to support the purchase or construction of industrial facilities that will be rented out to private businesses. The leasing fees that will result will be used to pay the interest and the principal to the bond holders.

You can invest in bonds in two different ways. You can either buy them through a broker or you can purchase them through a mutual fund. A broker is only an option for those of you considering making a substantial investment. Most require a $25,000 minimum initial investment. Mutual funds require much less - $1,000 or so. This makes them the more affordable option.