Tax-Free Bonds for Tax-Conscious Investor

Tax-exempt municipal bonds may not offer the most spectacular interest rates. However, if you are in a high tax bracket, that word "tax-free" maybe a good reason for you to consider this type of investment. After all, as it was once said, "It is not how much you make, it is how much you get to keep."

For example, if a municipal-bond mutual fund is paying about 4% and you're in the combined federal and state 40% tax bracket, you'll find that you need a taxable yield of more than 6.67% to beat the tax-free fund's yield.

Under present federal income tax law, the interest income you receive from investing in municipal bonds is free from federal income taxes. In most states, interest income received from securities issued by governmental units within the state is also exempt from state and local taxes. In addition, interest income from securities issued by U.S. territories and possessions is exempt from federal, state, and local income taxes in all 50 states.

Additional advantages of municipal bond investing include:

• Attractive current income free from federal, and, in some cases, state and local taxes;
• High degree of safety with regard to payment of interest and repayment of principal;
• Dependable income;
• Wide range of choices to fit in with your investment objectives with regard to investment quality, maturity, type of bond and geographical location; and
• Liquidity (e.g., in the event you must sell before maturity).