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|When should I own a municipal bond fund?
By The-Adviser.com -
|New York - If you
believe you are paying too much taxes but need stable income, you should consider
investing in municipal investments.
Municipal investments provide a steady income stream by paying interest. They are an excellent way to supplement retirement income. If you have an aggressive investment portfolio, municipal investments can also be used to provide balance and achieve diversification.
Municipal investments is one of the few remaining federal tax breaks. Generally, they provide an opportunity to provide earnings free from federal, state and local taxes. Although pre-tax bond yields are generally lower than those paid by equivalent but taxable investments, the tax-free effect can make up for the difference in yield and you may wind up with more of your money. If you purchase municipal investments from the state in which you live, the income may be double tax-free or even triple tax if your municipality is a city.
If you are subject to the alternative minimum tax, be careful. Your earnings from municipal bonds may be subject to tax.
Given our inherent dislike for actively managed mutual funds, we prefer that investors find and purchase individual municipal bonds (e.g. NYC Bonds if you live in NYC). However, an investor my not have enough money to purchase a single bond or is adverse to the risk associated with owning a single bond. In these cases, we do recommend low cost municipal bond funds.
If you pay the alternative minimum tax, your municipal investments may be taxable.
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