3 Things to Know About Municipal Bonds
Municipal bonds are issued by state and local governments and agencies to raise money for public projects, such as building highways and schools. Here are three things to know about them. We can tell you more.
- The interest from most municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local income taxes if the bonds were issued in your state.
- The higher your tax bracket, the more attractive tax-exempt municipal bonds become. Due to the tax exemption, municipal bonds tend to pay a lower rate of interest than taxable corporate bonds. But for someone in a high tax bracket, the tax savings can be significant enough that the after-tax yield of a municipal bond may be higher than that of a similar taxable bond.
To determine which type of bond offers you a better after-tax yield, you need to know the municipal bond’s taxable equivalent yield for someone in your tax bracket. That’s the yield you will need to receive from a taxable bond in order to match the yield of the municipal bond you are considering. We can assist you in calculating this.
- Municipal bonds lose their tax exemption in tax-deferred retirement. Tax-exempt municipal bonds are generally not a good fit for tax-deferred accounts, such as IRSs and 401(k) accounts. That’s because all of your investment earnings, including the interest from your tax-exempt bonds, will be subject to income tax when withdrawn from a tax-deferred account. Instead, consider holding tax-exempt municipal bonds in a taxable account so that the interest can avoid federal income tax and possibly state and local income taxes also.
Copper Leaf Financial is a fee-only, fiduciary firm and we can help you by providing advice on all financial matters. With offices in Williston and Rutland, Vermont, we develop a customized wealth management (financial) plan designed to integrate every aspect of your financial life. This is "true wealth management" - a holistic, all-encompassing approach that goes beyond just investment advice.
For assistance with developing and implementing an investment plan please contact our office at 802.878.1963 today.
Article published in Copper Leaf Financial publication Eye on Money - March 2018 issue.