Ahhh, the smell of legal tax-free money! What can be better than making money off of your investments, and not having to pay any taxes on them? Municipal Bonds are bonds that Municipalities, States, or Counties in a state issue to citzens in order to generate cash for projects. Commonly called “Muni’s”, these bonds are exempt from federal, state, and FICA taxes, and are a great provider of passive income.
You can buy Municipal bonds through a broker, such as E-Trade, or your very own broker. They are sold in $5,000.00 notes, usually with a $15,000.00 minimum investment required. They are very popular with the those in higher income brackets, such as the rich! You can buy municipal bonds from any state through your broker. However, if you invest in muni’s from another state, the state you live in may require you to pay state taxes on the income.
If you can’t shell out $15,000.00, you can still invest in Municipal Bonds! There are many municipal bond funds that you can get started with for as little as $1,000.00. These funds can be purchased through any mutual fund broker, and are great for those who can’t afford to invest in regular $5,000.00 notes.
Many Municipal Bonds are offered with what’s called a “Floating Rate” This means that the interest rate of the bond varies from time to time, and it’s usually based on a benchmark interest rate. Now would be the time to buy floating rate municipal bonds. This is because as interest rates rise, so will the interest rate of your municipal bond, if it has a floating rate. When interest rates are high, look for fixed-rate municipal bonds. That way if interest rates decline, you’re bond’s interest rate won’t be affected.
