Tax Free Municipal Bonds -- A Wise Investment?
by
Gregory Grant
Highway construction may not seem like a sexy investment. However, investing in municipal bonds, tax-exempt bonds issued to raise money for these projects, is considered a relatively safe bet. Municipal bonds can also help a more cautious investor diversify a portfolio with riskier investments and save money at tax time.
"Investors in middle to high tax brackets should consider investing in municipal bonds because the interest is free from federal, state and local taxes," says David Savetz of Merrill Lynch. "If you are in the 40 percent tax bracket a 6 percent municipal bond is equivalent to a CD or money market yielding almost 10 percent."
The risk to municipal bonds depends on the financial health of the local government or state that issues them. Rating is another factor. Triple A is the highest rating -- representing the most secure investment.
"Municipal bonds have varying degrees of risk," says Savetz. "A Triple A municipal bond is going to be safest, but won't pay you as much as a comparable lower credit worthiness bond."
The interest accrued on virtually all municipal bonds is free from federal taxes. Also, if you buy bonds supporting projects in your home state, you may avoid paying state and local taxes.
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When to sell a stock is as important as when to buy a stock. The investor that goes beyond just looking at the financial pages will find that this kind of in-depth research will pay off in helping to make wiser investment choices.