TAX-FREE MUNICIPAL BONDS &
MUTUAL FUNDS
If you truly wish to invest in your
government, consider tax-free municipal bonds. By so doing, you lend state
and local governments the capital (money) needed, so they may provide services
and public works which allow the nation's economy to grow. In addition to
benefiting the economy in general and your specific community, the income you
receive from these bonds are exempt from federal income tax. In many states, the
income they pay is also exempt from state and local income taxes.
$
→ STATE
→
HIGHWAYS
CITY
STREETS &ROADS
COUNTY
GOV'T BUILDINGS
GOV'T AGENCIES
STADIUMS & MORE.
The tax-free status of the municipal bond income can provide a significant
advantage over income from fully taxable investments. Examine the Tax-Free
Municipal Bonds
chart shown below.
TAX-FREE MUNICIPAL BONDS
Tax-Free Yield of 4.25% equates to the taxable
yields shown below.
Taxable Yields of:
5.67% 5.9%
6.34% 6.54%
Federal Tax Rates of: 25%
28% 33% 38%
As you can see, an investor in the 28% tax bracket must earn
over 5.9% (shown by the light
blue bar) in a fully taxable investment just to
equal a 4.25% tax free yield of a
municipal bond. The CD paying 3.5% (depicted in
light yellow) does not even match the tax free yield
on a straight comparison.
HOW DO YOU INVEST IN A MUNICIPAL BOND?
The two main ways to invest in such bonds
are; contact a
broker to buy individual bonds or buy shares (units) of a municipal
bond mutual fund. Investing in a municipal bond mutual fund offers several
advantages over the direct purchase of individual bonds. These benefits include:
affordability, diversification, liquidity and professional management.
Affordability -- the required initial investment for most mutual
funds is much lower than the $10,000 required to purchase a single municipal
bond.
Diversification -- it is one of the most important features of a
mutual fund. By definition, a mutual fund combines your investment dollars with
those of many other investors, thereby allowing the fund to purchase a larger
portfolio of securities than most investors could build individually. By
purchasing shares of a fund, you're essentially spreading your investment
dollars and thereby your risk over a number of investments rather than just one.
The obvious advantage is you avoid "putting all your eggs in one basket."
Liquidity-- it is another important benefit of mutual funds. You can
redeem all or part of your shares at any time at the then-current net asset
value. However, the value of your shares, when redeemed, may be more or less
than your cost, but this is true of individual bond ownership as well, if
redemption occurs before maturity.
Finally, a mutual fund offers professional
management. Portfolio managers have access to timely information on trends in
the financial markets, as well as in-depth data on potential investments. This
does not mean there is a guarantee a fund's goals will be met. Of course
it should improve the chances and track records of the funds performance can be
instructive.
Life
Insurance and Annuity Products
Retirement Plans
(e.g. IRA's)
Back
