Tax Free Municipal Bonds
Tax free municipal bonds (also called munis) are bonds that are simply issued by a state, county, or other local government.
The local government will generally issue bonds to fund projects that will be created for the general public such as building
or improving roadways, bridges, or other public services.
The great thing about municipal bonds is that the dividends and interest earned from them are generally free from federal,
state, and local taxes. Therefore municipal bonds make a great investment for someone who is looking to hedge against income
taxes. Beware that not all municipal bonds are tax free, though. They may be subject to the alternative minimum tax.
Because tax free municipal bonds are issued by the government, they are generally a reasonably safe investment to partake in.
As a result of this relative safety, the returns you can earn from a municipal bond are much lower than that of considerably
more aggressive investments. Also, because of the tax free status of the investment, many investors are willing to accept a
smaller return for the benefit of not paying taxes on the returns.
Tax free municipal bonds have a maturity of varying lengths. Some can be issued for as little as a few months to 10, 20, 30,
40 years or longer. Just like other bonds, the longer the maturity date on the investment, the more risky it becomes. As a
result of the added risk, the returns on the investment tend to be greater as well. And remember, the benefit of the municipal
bond is its tax free status.
As an investor, you can purchase municipal bonds directly from the municipality who is issuing them at the time they are issued.
If you do this you are purchasing them on the "primary market". You can also purchase them sometime after the original issuance,
which means you are purchasing them on the "secondary market".
When the municipality receives the money that you paid for a bond, you are promised to receive, over time, interest on your
initial investment, plus a little bit of your principal that you invested. The frequency at which you received these principal
and interest payments will vary depending on the type of municipal bond that is being issued. If it is a short term municipal
bond you will probably receive your principal and interest at the time of the maturity of the bond. If it is a medium to long
term bond, you will generally see payments made semi-annually or annually.
