A Quick Guide to Muni Bonds

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24 May 2019
Should you invest in muni bonds? Here’s a guide to help you make a good investment decision.

If you’re like many Americans who have a decent amount in savings, you may be looking into ways to invest your money so you can grow your nest egg. While doing some research, you may have come across something called a municipal bond.

If you’re curious about what a muni bond is, how to buy one, and if it’s worth investing in, read on for more information.

What Are Municipal Bonds?

Municipal bonds (also known as muni bonds) are bonds issued by either your state or county. They’re used to fund public services, such as schools, bridges, airports, roads, and highways.

There are two types of municipal bonds: general obligation (GO) and revenue. The amount from GO municipal bonds can be paid back through multiple tax sources and typically doesn’t make a profit. But with revenue muni bonds, as the name suggests, the issuing entity has to repay the amount in full through the revenue generated through their public projects.

By logic, this makes revenue municipal bonds riskier. It also has a higher rate of interest.

Are Municipal Bonds Taxable?

Municipal bonds are very attractive to investors because you’re guaranteed to be exempt from federal taxes when you invest in them. Some muni bonds are even exempt from state and county taxes, which means you can potentially invest in municipal bonds that are completely tax-free.

If you’re already looking into the future and are planning for your retirement, muni bonds are a smart choice to go with, especially if your marginal tax rate is high.

How to Buy Municipal Bonds

With regular stocks, you’d purchase them on public exchanges. However, muni bonds work differently.

When you want to buy municipal bonds, you use the “over the counter” trade method. Instead of purchasing your bonds off of a public exchange, you get them directly from a private party.

To buy municipal bonds, you have to get in touch with a broker who has the connections to get you them. Muni bonds aren’t under the same regulations as stocks are, which means you may have to pay a handsome markup.

However, any reputable broker who buys and sells muni bonds needs to be registered with the Municipal Securities Rulemaking Board (MSRB). This means they’re required by the board to give you adequate information on how much the markup would be before you buy from them.

There’s also a minimum investment you have to make with muni bonds. This amount is usually $5,000; if you want to invest more, you can only do so in increments of $5,000, which makes this type of investment less flexible when compared to stocks.

Invest in a Muni Bond

As you can see, if you have some disposable income and you’d like to invest it, a muni bond can be a wise way to make your money grow. Since there are definitely no federal taxes to pay on them, plus the possibility of no local taxes either, you can essentially invest your money in a tax-free way.

If you’d like the advice of a professional financial advisor, then get in touch with us now to schedule a meeting.

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