Tax-Free Investing with Municipal Bonds

Tax-Free Investing with Municipal Bonds

Keeping more of the money they?ve worked so hard for is important to most individuals. For this reason, investing in vehicles that are exempt from federal taxes can be very attractive. One of the very first tax-advantaged investments, municipal bonds, is still one of the most popular today. Municipal bonds are debt obligations issued by states, cities, towns, or public commissions to provide money for schools, hospitals, and other public works. These securities provide income that is free of federal and, in some cases, state and local taxes. Although income generated by most municipal bonds is exempt from federal taxes, any capital gains earned from the sale of bonds are subject to all federal and most state tax laws. Certain issues may be subject to the alternative minimum tax as well.

Investors may choose from a variety of municipal bonds with varying maturities. Municipal bonds may also be purchased through mutual funds. By investing through a municipal bond fund versus purchasing individual bond issues, you can benefit from both diversification and ongoing professional management of the fund. Also, municipal bond funds pay monthly tax-free income, unlike the underlying bonds, which pay semi-annual or annual interest.

Investors should consider a fund's investment objective, risks, and charges and expenses carefully before investing. The prospectus, which contains this and other important information, can be obtained by contacting your investment professional and should be read carefully before investing. The investment return and principal value of an investment will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Bonds are subject to interest rate risk, such that prices on existing bonds will generally decline as interest rates rise.