Should I purchase municipal bonds?

Investing in municipal bonds is a good way to preserve capital while generating interest. Most of them are exempt from federal taxes, and some are tax-free at the state and local level as well. Munis are often considered a separate asset class, so it pays to know the muni bond basics.

Who are municipal bonds suitable for?

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems.

Can a business invest in municipal bonds?

The interest on municipal bonds — which are issued by state and local governments — is nontaxable to corporations, as well as to individuals and other business structures.

Who can purchase municipal bonds?

In general, you’ll likely buy municipal bonds from a bond dealer, bank, or broker, like Ally Invest. Learn more about how to buy bonds and the ins and outs of the bond market. If you don’t want to invest directly in the bond market, you can also invest in bonds through mutual funds or ETFs (exchange-traded funds).

What makes a municipal bond a good investment?

Municipal bonds are a great investment for risk-averse investors. When governments need to raise money, they will issue debt obligations called bonds. When you buy the bond, you are loaning money to the government in exchange for earning interest.

Do you have to pay taxes on a muni bond?

Muni tax issues can be tricky, so you should always check your local tax laws to be sure. If you invest in a municipal bond issued in another state, you will probably have to pay taxes. 8  10  When you factor in the tax impact, a completely tax-free municipal bond will usually present a more profitable opportunity.

Which is the safest type of muni bond?

There are two types of muni bonds. General obligation bonds are funded directly by tax revenues. They are the safest type of municipal bond, but they often have the lowest interest rates. Revenue bonds obtain money from ticket sales, bills, tolls, or rents from municipal government projects.

How long does it take for a municipal bond to mature?

Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade. Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued.