On the Path to Financial Independence: Want tax free income? Try Municipal Bonds!
This is not investment advice
Municipal Bonds backed by the city or state
Municipal bonds are unique for people looking to achieve financial independence because of their favorable tax status. Municipal bonds are loans to state or local governments, so that money can be available to improve the neighborhood. For example building new schools, and you get paid back by the property taxes.
Videos:
These bonds can be backed by general obligation city/state taxes (low risk?), city/state revenue(moderate risk?), or prerefunded bonds which may be the safest.
Are Municipal Bonds tax exempt?
There are some Municipal Bonds which offer tax free interest. This may not seem like much but it is possible get tax free interest which is a huge deal for some people. Federal income taxes are exempt and this video explains more:
What kind interest can you expect?
Municipal Bonds pay interest. Some Municipal Bonds are "high interest" or "high yield" but a very good rate could be 2.5-3% interest. Municipal Bonds are considered to be a low risk investment so yield might not be as high as high yield dividend stocks, but they are still interesting.
Where can you buy Municipal Bonds?
But what you get from Municipal Bonds is peace of mind and tax free income!
If you like this post, check out the other post in this series!
References
I think it is necessary to point out that although Muni bonds have attractive features, including higher after tax yield than certain other securities they also pose significant risks, including PRICE RISK and CREDIT RISK. Muni prices move inversely to interest rates. In simple terms, this means that if rates go up, bond prices (i.e. the price you can sell the bond for on the open market prior to maturity) goes down. Depending on the duration (how much time left to the maturity date), even small changes in rates can cause HUUGE fluctuations in price. Anyone buying bonds today needs to understand that rates are at historically low levels, and as a result, the risk of market declines is significant if rates move up. In general, the higher the yield, the longer the duration and the greater the price risk. Also, many of these bonds have significant CREDIT RISK. This is the risk that the issuer will not be able to pay the interest or principal at maturity. This has happened before, and WILL happen again. Just need to watch the Detroit, San Bernardino CA or Puerto Rico situations if you doubt it. As I've written elsewhere, I agree that bonds and particularly sovereign debt, can be described as the "Mother of all Bubbles", and I've predicted it will not end well for bond investors.
Do you have any sources you can cite? Or are you someone with qualified expertise in finance? You might be right about the risks, but I'd like to see where it's written.
As far as bubble, that could also apply to housing, stocks, and just about everything in this economy. So if sovereign debt is a bubble then what is safe?
Yes. I'm highly qualified in financial matters, but the points I'm making are elementary and non-controversial. Anyone with a passing knowledge of bond fundamentals would agree with me. [point of clarification: The non-controversial part is that there are significant risks from both interest rate price sensitivity and credit quality. Not all would agree that we are in a "bubble"].
Right, would you care to outline your qualifications at least? Just saying anyone would agree with you, without citing sources or qualifications, is vague. In my post, I did cite the sources which I am guessing you disagree with? So are there some people with similar qualifications who say what you are saying?
https://www.equities.com/news/what-you-need-to-know-if-you-re-exposed-to-muni-bonds
@dana-edwards
The goverments already owns way too much money for me to trust it with bonds. You might get a cut on taxes but the risk is higher than gambling.
If you can find a way to acquire $1 million dollars, then you can in theory use Municipal Bonds to receive $50,000 a year in tax free income.
Even if you don't have $1 million dollars, I'm sure some of the Steemit whales do. Despite what most people think, these are low risk bonds and taxes usually get paid. It's not like people can avoid paying property taxes.
They are NOT low risk.
My sources say different. So where are your sources?
http://www.wallstreetdaily.com/2015/03/25/state-pension-municipal-bonds/
Wow
This Is Cool
Investing in bonds during the world's largest bond bubble? No thanks.
Municipal Bonds, not commercial bonds. These bonds are backed by city or state taxes. The yield of 2.5% is reasonable. Of course if you've got something better which offers tax free income and similar yield, please post about it.
So cities have never gone bankrupt? Look at Detroit, look at munis in Puerto Rico defaulting. This is a bubble, and bonds at record low interest rates with record risk isn't something I would consider a safe or prudent investment choice.
I hope you don't take this as a shot, article's well written. I just don't think the municipal bond market is the safe haven it once was.
No one said there is no risk at all. Any investment has some risk. You can diversify, don't buy Municipal Bonds all from the same city. If you spread your risk then the math does work in my opinion.
During a recession, with negative interest rate policies spreading, the growth will be stunted in the economy. With no central bank to bail out munis, and a declining tax base, munis are one of my last choices. I have profited nicely from the pm mining stocks as well as crypto-currencies. Any investment can be tax free income, just grow it inside of a roth ira.
Stocks and cryptocurrencies are two of the most high risk investments I can think of. And Roth IRA defeats the point because you can't touch it. So how do you live off of it if it's in that?
For low risk, precious metals are a 6000 yr tradition of safety. Roth IRAs can be withdrawn after 5 years.
everything which is tax free income is f.... great :)
In Canada we have tax-free savings accounts although there are annual caps. Up until this year we were allowed to deposit $10K into our TFSAs each year but it's been lowered to 5K now. A better solution would be to place your savings in low index funds (ETFs). Mine has averaged 14% annually since 2011.