One of the things many investors are looking for is a way to avoid paying more taxes on the earnings from investments. One way to do this is to invest in municipal bonds. Municipal bonds allow you interest free of federal taxes (check your state rules, though — you may have to pay state taxes on the earnings). And municipal bonds are also relatively safe investments.
What are municipal bonds?
Municipal bonds are used in funding for city infrastructures. A bond is basically a debt. Cities can use the money they get from bonds to pay for roads and schools over a long period of time, rather than paying all up front. Here’s how it works: when you invest in a bond, you are basically lending the money to the city. There is an “IOU” of sorts written up for how much you put in. You earn interest (between 4 and 5 percent right now) that is paid to you regularly during the term of the loan. When the bond term is up, you are repaid the original amount you put in.
Now, 4 or 5 percent doesn’t sound that great in terms of returns. After all, your online savings account can get you that. But the benefits come in the tax status. You have to pay federal taxes on what you earn from a savings account. As mentioned before, you don’t have to pay federal taxes on interest earnings from municipal bonds (again — you might have to pay state taxes).
If you are interested in investing, and are looking for a way to do it with a fair amount of safety, you might consider municipal bonds. They won’t provide you with sexy returns like some of the riskier investments (don’t stake your retirement on the returns from municipal bonds), but they can make a solid addition to a well-balanced portfolio.