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The higher the tax bracket of the investor, higher will be the tax free yield. People usually invest in municipal bonds based on the state they live in. This means that your bond would be free from federal, state and local taxes if you buy municipal bonds in the state you live in. However, if you buy municipal bonds outside your state, you will have to pay state and local taxes, and this applies to general obligation bonds and revenue bonds.
In case you are looking to invest in municipal bonds, there are brokers who can help you. However, investing in municipal bonds ultimately boils down to the following important factors:
- State issue of the bond
- Tax bracket you are in
- Date of maturity of the bond
- Call date
- Coupon and nominal yield
Usually coupon and yield on municipal bonds is low but the after tax yield is much better. This again will be based on your tax bracket.
Another thing to remember is that most municipal bonds are callable because the issuers want the fiscal flexibility to call back the bonds before the maturity date. The reason why bonds are called back is because the interest rates decline and the coupon rate is considered to be too high. Therefore, when investing in municipal bonds, it makes sense to invest in bonds with staggered call dates so that your portfolio is laddered.
All municipal bonds are rated with AAA being the safest bonds. However, even bonds that have a credit rating of AA, A or Baa are safe investment choices.
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