Buy Tax Free Municipal Bonds

This article discusses buy tax free municipal bonds. Tax-free bonds have always been popular with people in the upper income brackets. But middle-income investors should study them as well.

The purpose of tax-free bonds is to preserve capital, with a good after-tax income. Use them instead of huge savings accounts or heavy investment in money-market funds. They are not usually used as a way to build an estate. They are generally more appropriate for older investors who need income but are not yet retired. As people approach retirement, they can pick the maturity most appropriate (municipals can mature in anywhere from one to fifty years). When income falls into lower brackets after retirement, investors can switch to corporate bonds or stocks.

Ways to invest in tax-free bonds:
Unit Investment Trust: A portfolio (put together by professionals) of various tax-free elements to diversify risk and maximize yield. In many states with income tax, a Unit Investment Trust uses a portfolio that qualifies for double tax-free status, generally state and local bonds plus Puerto Rican issues. A Unit Investment Trust does not use a professional portfolio manager after the original assortment of bonds is put together. You can get monthly, semiannual, or annual interest payments or participate in a reinvestment plan. There is also a secondary market enabling you to sell your shares. (Unit Investment Trusts require a $1,000 minimum investment. There is no annual management fee.) See municipal bonds for more information.

To Buy Tax Free Municipal Bonds - Top

Managed bond fund: The fund is a diversification of bonds, like the Unit Investment Trust, but it is professionally managed throughout its lifetime. Its yields are expected to be higher. And there is a management fee.
Individual bond: It requires research to select the right one. The quality of municipals is rated by Moody's and Standard & Poor's independent rating services. If you are extremely concerned about the risk of bankruptcy, buy a bond that is insured against default by an insurance association. Another way: An AAA-rated low-risk issue. While 98% of all municipalities met their debt obligations during the Great Depression, it pays to buy something you won't lose sleep over.
General obligation versus revenue bond: A novice in tax-free investments would probably feel more secure with a general obligation bond. It is backed by the full faith and credit of the issuer. A revenue bond depends on the income of a specific facility. For instance, some bridge and road bonds may not have sufficient revenue from cars and trucks to pay interest.

Liquidity of municipals is fairly good. Tax-free are usually bearer bonds and can easily be sold. However, if the market is down because interest rates have gone up, you may lose some of your capital if you sell before maturity. Therefore, avoid investing money that may be needed.

Tax-swapping is a trading technique that allows you to take a tax loss when you trade one bond for another of equivalent return and quality, if your original bond is below cost. (In reality, you have lost nothing if you hold your next purchase to maturity,) This has traditionally been done by insurance companies and corporations aggressive in money management. Do it when you want to offset a capital gain on another investment.

Don't be passive about bond investment.
You shouldn't be tied down to one of these bonds. Big tax swaps should be used to offset large capital gains.
Discounted tax-frees enable you to get the yield and a capital gain when the bond matures. Important: Quality, price, yield, maturity.

Bond-Buying Strategy: The classic bond-buying opportunity when interest rates drop: Investors can lock in high yields and defer interest income, too. One study calculates that 20-year, AAA-rated industrial bonds rose an average of 15.6% during five interest rate swings. These swings, from peak to trough, usually lasted for about one year.
Conservative strategy: AAA-rated corporates or Treasury issues.
Aggressive strategy: Lower-rated issues that swing more in price, providing greater tax deferral (and greater risk). However, even speculators avoid bonds rated lower than A when the depth of recession is not completely clear.
 

Source: Consumer Information Center

Disclaimer: While every effort is made to ensure that the content of this website is accurate, the website is provided “as is” and Bizmove.com makes no representations or warranties in relation to the accuracy or completeness of the information found on it. While the content of this site is provided in good faith, we do not warrant that the information will be kept up to date, be true and not misleading, or that this site will always (or ever) be available for use. Nothing on this website should be taken to constitute professional advice or a formal recommendation and we exclude all representations and warranties relating to the content and use of this site.

 Copyright © 2010 by BizMove.com. All rights reserved