Municipal bonds are debt instruments—issued by states, counties, cities and local government authorities—that are used to fund public projects such as schools, highways and the like. They provide an appealing investment option because while interest income may be subject to alternative minimum tax, with limited exceptions, their interest income is exempt from federal income tax. They are usually exempt from state and local income tax, as well, if the bondholder lives in the jurisdiction where the bond was issued.
Municipal bonds, often referred to as “munis”, are an attractive investment for high-tax-bracket individuals seeking a source of tax-advantaged income. They provide an additional investment option to supplement IRAs and other retirement plans when you have already made the maximum, allowable contribution.
There are several ways to invest in bonds:
- Direct ownership Bonds can be purchased individually and held in your name.
- Indirect ownership You can invest in a professionally managed pool of diverse bonds which is a portfolio of Municipal Bonds that is held for the life of the bonds.
Insuring Against Possible Risks
While municipal bonds can generate a high return, and offer the tax advantages described above, they do have some inherent risks. If a bond is sold before maturity, for example, you may receive more or less than what you originally paid for it. Or, the issuer of the bond could default on the payment of principal or interest. It is possible and advisable to seek bonds that are insured. While this extra assurance will not guarantee the market value of a bond, it will protect you against the risk of default.
Municipal bonds, like any other form of investment, need to be viewed as one part of your investment strategy. To learn more about how they may fit into yours, contact Brooks’ financial services department for a personal consultation.
