Tax Free Investments - Munis - Municipal Bonds

It's a nice option for those who want to keep hold of their investment money and also it's Tax free income. That only means, the interest earned from this investment is tax-free. Few of them are Federal Tax Free and few of them are Federal and State Tax free.

Why tax free?

Municipal bonds are debt obligations issued by states, cities, counties and other government entities to fund public projects such as construction of schools, highways, hospitals and sewer systems. As an incentive for investors to buy municipal bonds, the interest earned is free from federal, and in some cases, state income tax.

General Obligation Municipal Bonds are backed by the credit of government issuer. Revenue Municipal Bonds are backed by the funds generated from a specific project (i.e., tolls from a bridge or revenues from a water system). Revenue bonds generally pay higher yields than GO bonds, because payments are secured only by a specific revenue source as opposed to the full taxing authority of the issuer.

Though the returns from these investments are comparatively less than that from taxable mutual fund investments, it's a good option to generate tax-free income for those who are under higher tax bracket.

In addition to receiving tax - free income, investors who buy municipal bonds issued in their state of residence may enjoy additional tax benefits. That's because many states do not tax residents on the income earned from munis issued in the state. Buying such funds of other state, may bring federal tax relief but not state taxes.