Here’s Why Municipal Bonds Belong in Every Investor’s Portfolio – Mooresville Tribune

Posted: September 21, 2020 at 11:54 pm


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Municipal bonds have historically low default rates, which means that if you choose to invest in them, you're likely to get all of your interest payments on schedule, especially if you choose bonds with a high credit rating. But here's where municipal bonds have a major advantage over corporate bonds: You'll get a huge tax break for putting them in your portfolio.

The interest you earn from corporate bonds is subject to taxes -- there's no getting around it. On the other hand, municipal bond interest is always exempt from taxes at the federal level. Furthermore, if you buy municipal bonds that are issued by the state you reside in, you'll avoid state and local taxes on that interest as well. That's a good thing if taxes are a concern for you, whether because you're already in a high bracket or you're worried about paying them during retirement.

Now one thing to keep in mind is that while municipal bond interest may be tax-free, capital gains on the sale of those bonds -- which will apply if you buy municipal bonds and then sell them at a price that's higher than what you paid for them -- will still be subject to taxes, the same way you'd pay taxes for selling a stock at a price that's higher than what it cost you to buy. But that interest income won't generate a federal tax bill, which makes it a nice source of incoming cash for you. You'll have the option to reinvest that interest as you see fit, or collect it and use it to supplement your income (retirement or otherwise).

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Here's Why Municipal Bonds Belong in Every Investor's Portfolio - Mooresville Tribune

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September 21st, 2020 at 11:54 pm