Tax Free Bonds

If you are new to the investment world and don’t know where to invest your money, some of the choices will surprise you. There are so many options available that it is difficult to know where to even start. How about looking at tax free bonds?

What are tax free bonds? Bonds are money that you are loaning to another organization so that they can pursue specific projects. For example, if you purchase municipal bonds, the money may go towards building a new highway. Tax free bonds are exactly as the name implies. These are bonds that are purchased with the stipulation that the earned interest will not be taxed to the investor.

What types of tax free bonds are available to the investor?

The U.S. government offers bonds to help pay for public projects. With these government bonds, federal tax is charged but there are not any state or local taxes. Municipal bonds are issued by a state or local government. These are sometimes referred as “triple free” because they are exempt from Federal, state and local taxes.

Government Treasury Bonds

There are many advantages to purchasing U.S. Treasury Bonds with few drawbacks. They are excellent investments.

If your portfolio does not include high risk investments, then these bonds will fit in nicely. Backed by the Federal Government, they are extremely safe. U.S. Treasury bonds have various maturity dates available to buy. This allows great flexibility with your funds. The interest rates on these bonds are not as high as other investments. However, low risk investments usually have lower return rates. The tax breaks on U.S. bonds make them even more attractive. Although the Federal Tax does apply, state and local taxes do not. Combine these tax breaks with the rate of return and the bonds become competitive.

The main disadvantage with U.S. bonds is that they are not completely tax free. Federal taxes are collected so if you are looking for tax breaks, these might not be the bonds for you.

Municipal Bonds

Municipal bonds, or Munis, are a safe investment, much like the U.S. bonds. Since they are government backed, they are extremely safe. Municipal tax free bonds do not offer excessively high interest rates but they are completely tax free. This offsets the lower rate of return and makes the investment much more profitable especially if you are in a high tax bracket.

The main disadvantage with municipal tax free bonds is that they are somewhat restrictive on their maturity rates. If you are investing long term and won’t need to liquefy before the maturity date, municipal bonds are an excellent place to invest your money.

Most financial advisors will counsel their clients to diversify their investments. This is sound advice and a part of your portfolio should be low risk investments. Tax free bonds are an excellent choice for these types of investments and, as an extra bonus; tax does not have to be paid on them.

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