Municipal Bonds: Not As Boring of a Financial Topic as You Might Think!

June 27th, 2007 • Related • Filed Under • by admin

When I first heard the term municipal bond in high-school, I figured it was some boring personal finance term that I would never need to use or ever consider caring about. I had my money in a savings account, and I figured there was no reason to put it anywhere else at the time, after all the money was going for college! It turns out that municipal bonds are a great place to throw money that you want to be in a relatively safe investment.

Munici….what? Take a look out the window, You’ll probably see a road of some sort. Guess where the money to pay for it probably came from? You guessed it, a municipal bond. Municipal bonds are used by cities to pay for civic infrastructure, such as public buildings and roads. This allows for cities to get the improvements they need, and pay for them slowly over a period of time.

But what’s in it for me? If you put money in a municipal bond, you’re throwing money into a very safe investment. If you’re afraid of losing your money in the market and don’t want to take a lot of risk, a municipal bond is a great place to put your money. It will offer you a very decent rate, between 4% and 5% currently. This is what most savings accounts are offering.

Why is it better than a savings account? The answer is that any interest you earn from a municipal bond is completely tax free for federal purposes. You have to pay federal income tax on any money in a savings account or pretty much any other type of investment, but not with municipal bonds. You still might have to pay state taxes, but there’ll be no federal capital gains tax to speak of, and that’s nice!

You won’t earn as much as other investments, but if you are in the 28% tax bracket, the 4.33% you’re earning would be exactly like earning 6.02% on a taxable basis, and earning 6.02% guaranteed is almost impossible to do anywhere else! If your tax rate is lower, they’re still a good investment, but if you’re down near the 10% or 15% brackets, you might consider sticking with a good old fashioned savings account for hassle purposes.

If you’re in one of the higher tax brackets and are sick of sending money to Uncle Same every year, investing some money into a municipal bond might be a good way to earn some tax-free income.