Tax-free bond funds or municipal bond funds are one of the best sources of non-taxable income. They are bonds which are issued by state or local governments. The main reason to buy such bonds is that they are entirely tax-free and offer a diversified option for investment. In this article, some of the benefits and reasons to invest in tax-free bond funds have been listed.
Low risk and safe for investment
Even though tax-free bond funds or municipal bonds give lower yields, they come with an extremely low-risk factor and are very safe for investing your money. The only thing you need to ensure is that you do not put this money in retirement or a Roth account because all the income of the Roth account is taxable in any case. These funds are safe for investment because they are backed by the local or state governments. Also, there are some bonds which give higher yields because they invest in bonds which provide better returns than the average municipal bonds.
Great for people with a high taxable income
Experts suggest that people who want to invest their money in a Roth account should not invest in a tax-free bond fund because they would not be able to take advantage of the tax-free feature. These bonds make more sense for individuals who have an extremely high income and want options for tax deferment. Since the profits you earn on this fund is not taxable, the investors get yields on their invested money and get to save on tax as well. If you want to add an investment option to your portfolio which gives you returns as well as saves you from high taxes, then this is an excellent choice.
Choosing the right option for municipal bonds
Tax-free bond funds or municipal bonds are divided into two categories. One is a general obligation (GO) bond, backed by the municipal entity and the other is a revenue bond which gives you funds by the revenue that is expected from municipal projects. You may check the bond’s worth by seeing the investments it has made and the insurer’s creditworthiness as well. Analyze a general trend of growth in the past 2–3 years to get an idea of the yields you may get out of the bond.
Every state or local entity offers these municipal bonds. The rates differ as per the location and the bonds provided by the government of that state.