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What is the best way to buy municipal bonds?
In general, you’ll likely buy municipal bonds from a bond dealer, bank, or broker, like Ally Invest. Learn more about how to buy bonds and the ins and outs of the bond market. If you don’t want to invest directly in the bond market, you can also invest in bonds through mutual funds or ETFs (exchange-traded funds).
What are the benefits of buying a fund instead of buying individual bonds?
The key benefits to owning bond funds are: Greater diversification per dollar invested: It is much easier to achieve a diversified bond portfolio per dollar invested using a fund, because you obtain exposure to a basket of bonds within the fund.
What bonds are federally tax-exempt?
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes. Municipal bond income is also usually free from state tax in the state where the bond was issued.
Do you pay capital gains on municipal bond funds?
Capital gains on municipal bond investments are taxable as short- or long-term capital gains, depending on how long you have held the investment. Municipal bonds generally are not held in tax-deferred retirement accounts since the investment returns in these accounts are taxed as ordinary income upon withdrawal.
Why are municipal bonds default to free?
Both general obligation bonds and revenue bonds are tax-exempt and low-risk, with issuers very likely to pay back their debts. Buying municipal bonds is low-risk, but not risk-free, as the issuer could fail to make agreed-upon interest payments or be unable to repay the principal upon maturity.
How much do municipal bonds pay in interest?
You have a choice between investing in general corporate bonds or tax-free municipal bonds. The corporate bonds yield 7\%, and the tax-free municipal bonds yield 5\%.