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Municipal Bonds - Understanding Tax Free Municipal Bonds
Municipal bonds and notes are issued by state and local governments. These municipalities include:
Interest payments on traditional municipal bonds are exempt from federal tax. They are subject to state and local tax.
Tax Free Yield
When looking to purchase muni bonds, a person should understand how tax exempt yields work. The higher the tax bracket, the higher the yield. If an investor is considering buying a 6% municipal bond at par and they are in the 28% tax bracket, the tax free yield would be higher than 6%. The formula is: Municipal stated rate or coupon divided by 100 minus the tax bracket.
The calculation would break down like this:
6% divided by 72 (100-28), which equals 8.33%. This means that to achieve a better return than this 6% coupon bond, you would need equal to or better than 8.33% in a taxable investment. A lower tax bracket would show a lower tax free yield.
Type of Municipal Issues
There are two main types or ways a municipality can guarantee or back its bond. One way is through the taxing power of the municipality. This would be called a General Obligation Bond or G.O. Bond. Another is called a Revenue Bond, which uses specific revenue sources to secure the issue.
General Obligation Bonds
These are the most common and normally the better rated issues. A state raising money and backing the bond issue with higher income or sales tax would be considered a G.O. Bond. A school district rasing money through a broker dealer on a municipal bond and securing the bond investors with school or property tax revenue is considered a General Obligation bond as well. Since taxes are the most secure source for money now and in the future, some investors prefer them over most revenue issues.
Revenue Bonds
Issues that rely on the revenue producing ability of a facility or from the issuer through other means are Revenue Bonds. There are several types of issuers. These would include:
Triple Tax Free Municipal Bonds
Investors who buy municipal securities issued within their own state are exempt from federal, state and local taxation. An investor in California should consider buying California municipal bonds above issues from outside the state. Retail or individual investors should only buy from within their state because of this. Larger institutions will normally buy from all over the country.
Municipal bonds should be a part of most investor portfolios. They are also a way of supporting your local area.
For more information:
Nick Hunter is the President of American Investment Training, AIT and the owner of - A financial education and career website.
How to Get Free Money to Save for Your Childs College Education
Did you know that a college educated person will earn 2.5 times more over a lifetime than someone without a post secondary education College educated people are more likely to keep their jobs when times are tough and are more likely to be working than those without a post secondary education. Now getting an education can be expensive. One year in a Canadian degree program such as an arts and science program can easily cost $5000/year. If you are an out of province student, the extraneous expenditures can easily increase your education costs by $3000/school year.
To help pay for future education cost, the Government of Canada has taken great initiative to ensure that every Canadian child will have the funds necessary to get an education by providing families with free government grants. The free grant was introduced in 1998 to encourage parents to start saving for their childrens education costs.
How does the program work
The most popular form of the education savings is the registered education savings plan known as an Resp. Although an Resp can be started at any time, parents are advised to start an Resp when the child is born. Qualifying families who start the plan early will receive a $500 government bond in the first year to invest towards the program. Once the plan is started, the Government of Canada will continue to contribute by matching every dollar invested anywhere from 20 up to 40%.
A good strategy for investing into an resp is to invest your monthly government child tax benefit. So for example, if your family receives $50/month per child in child tax benefit and if you invest the benefit into an Resp, not only will your Resp earn interest from the investment firm but it will also be topped up with the 20-40% contribution from the government. Therefore, a $50/month investment earning 5% annually will easily gross $45,000 at maturity (18 year plan). And the best part is you will be using free money from the government (Child Tax Benefit) to earn free government grants on the investment. So take advantage of the free government grants by opening an Resp and secure your childs future.
Angela McKenzie has an online program aimed at helping parents learn more about the Free Government Grants and saving for future education costs. To learn more on how you can take advantage of free Canadian grant visit http://www.respresourcecenter.org
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