Municipal Bonds Aren't Just for the Rich Anymore

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Municipal Bonds Aren't Just for the Rich AnymoreIf you've got money in a checking or savings account, you know how stingy banks are about giving you the interest you deserve. But with many alternatives to bank CDs paying even less in income, many people who depend on drawing money from their investments have been struggling to make ends meet.

But one income investment has actually gotten more attractive recently. Yet because it's perceived as being strictly for rich people, many ordinary Americans never think twice about it.

Right now, municipal bonds could be the answer for many folks trying to make their money work harder for them.

How Muni Bonds Work

Municipal bonds look a lot like other kinds of bonds. State and local governments issue muni bonds in order to finance a variety of public projects, ranging from general budget outlays to specific uses like building sewers or schools. In exchange for getting money up front, the government pays investors regular interest payments and promises to return the money at a set date in the future.

The big advantage that muni bonds have is that their interest is exempt from federal income tax. Unlike regular bonds, upon which interest gets taxed at rates as high as 35%, muni bonds let investors keep every penny they receive.

The trade-off for muni bond investors is that they usually have to accept much lower interest rates than traditional bonds. Because high-income investors get more value from the tax break on muni bonds, they're a favorite investment for the rich.

An Unusual Opportunity

Recently, rates on municipal bonds have been very close to those of taxable Treasury bonds. As a result, even those who pay only modest tax rates on their income could see an after-tax benefit from investing in muni bonds.

Those attractive rates don't come without risk, however. The recession hurt tax revenues for many state and local governments, putting their creditworthiness in jeopardy. Some experts believe that a number of governments could default on their muni bonds. Because the bonds aren't insured by the federal government, that could leave investors facing a potential loss of their principal.

But for those willing to take on some risk, the added income could be enough extra reward. With mutual funds and ETFs giving you easy access to a wide range of muni bonds, taking a closer look at how muni bonds could boost your income makes a lot of sense right now.

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Paul T Caple

If your adjusted groos income exceed $ 85000. you will pay more for your medicare.
so muni aren't always tax free

December 14 2012 at 6:37 AM Report abuse rate up rate down Reply
corbfield2

Yes, bonds (munis) do not allow for inflation. And yes, they give a lower rate then some stocks with higher dividends. And yes, cities and staes are in a precarious situation right now with budgets. But, companies and even large and venerated old line companies go bankrupt or under. And some have halted dividends for awhile and reinstated them later at a lower rate. But munis give you tax free interest and in my state tax free interest earned (Ohio) on munis purchased for instate buyers who reside there, not to mention the federal atx free interest earned. And they give you that nice steady income you need in any portfolio. Any investment is a risk, but munis or any bonds are worth having in any portfolio for diversification.

March 29 2012 at 8:21 AM Report abuse rate up rate down Reply
Davie2743

Every investor should have a percentage of their investments in a mutual fund that contains bonds it is a safeguard and generally tax exempt.

March 27 2012 at 10:43 PM Report abuse rate up rate down Reply
1 reply to Davie2743's comment
venturamickey

Tell that to the retired persons in Stockton CA. who now have nothing

June 30 2012 at 1:12 PM Report abuse rate up rate down Reply
jack

How much do they pay these reporters to print pump and dump propaganda?

March 27 2012 at 6:34 PM Report abuse +2 rate up rate down Reply
smaselli12

Only a dumb a$$ would consider buying a muni............cities can't print money and defaults on the way!

March 27 2012 at 5:43 PM Report abuse +3 rate up rate down Reply
dgs755

I wished the writer of this story would have also covered the derivatives nightmare of interest rate swaps killing state local and city governments so the wall street thieves can make a few bucks on the sheep.

March 27 2012 at 4:49 PM Report abuse rate up rate down Reply
dgs755

Of course not, they need fools to buy this crap.

March 27 2012 at 4:46 PM Report abuse +4 rate up rate down Reply
Hardy

bonds are lousy right now...

March 27 2012 at 2:13 PM Report abuse +1 rate up rate down Reply
1 reply to Hardy's comment
venturamickey

the only good bond is glue

June 30 2012 at 1:15 PM Report abuse rate up rate down Reply