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.

How are taxable municipal bonds taxed?

Most munis pay interest that is exempt from federal and potentially state income taxes. However, interest on some municipal bonds is subject to both federal and state income taxes.

How are muni bonds taxed when sold?

While munis are generally assumed to be tax-free, investors should determine a bond’s tax consequences before investing. While the interest income is usually tax-exempt for municipal bonds, capital gains realized from selling a bond are subject to federal and state taxes.

Are muni bonds tax-exempt?

Municipal bonds (also known as “munis”) are fixed-income investments that can provide higher after-tax returns than similar taxable corporate or government issues. In general, the interest paid on municipal issues is exempt from federal taxes and sometimes state and local taxes as well.

Is the interest on a municipal bond tax free?

Tax-free municipal bond interest is free from federal income tax, but private activity municipal bond interest is subject to AMT. Private activity municipal bond interest is tax free unless the issue is a taxable municipal bond. Private activity municipal bonds are bonds used to finance bridges, hospitals, private universities, and airports.

Who is a good person to invest in muni bonds?

Muni bonds are often a good investment for people with high incomes, such as celebrities, living in states with high income taxes, such as California. A retiree with limited income living in a state without income taxes, such as Florida, benefits less from the tax exemptions of municipal bonds. Should You Consider Muni Bonds?

Which is better to invest in corporate bonds or municipal bonds?

Investing in municipal bonds is a good way to preserve capital while generating interest. Municipal bonds hold several tax advantages over corporate bonds. Another advantage that munis have over corporate bonds is a much lower rate of default. 2  3 

Are there any ETFs that invest in municipal bonds?

With exposure to so many municipal bonds, a single default would not have a significant impact on the ETF. Most municipal bond ETFs keep their portfolios well-balanced, with one municipal bond’s share of net assets typically limited to 2% or less.