Buy Tax Free Municipal Bonds
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In late 2021, interest rates were rising, and municipal bond rates were rising along with them.As of July 10, 2022, 10-year AAA-rated muni bonds returned 2.60% compared to 2.70% a week earlier. A 20-year AAA-rated bond returned 2.90% compared to 3.00% the week before. A 30-year AAA-rated bond returned 3.05% compared to 3.15% the week before.\"}},{\"@type\": \"Question\",\"name\": \"Can You Lose Money on Municipal Bonds\",\"acceptedAnswer\": {\"@type\": \"Answer\",\"text\": \"You can lose the money you invest in municipal bonds if the issuer defaults. That risk is vanishingly small, considering that defaults on municipal bonds reached 0.05% of $3.9 trillion of outstanding debt in 2020, a time during which local tax revenues were decimated by the COVID-19 pandemic.You also could lose money on muni bonds if you are forced to sell the bonds on the secondary market at the wrong time. The price you get will be determined by the total dollar amount of the remaining interest payments due, factoring in the prevailing rates available on new issues.\"}},{\"@type\": \"Question\",\"name\": \"Which States and Cities Have the Best Municipal Bonds\",\"acceptedAnswer\": {\"@type\": \"Answer\",\"text\": \"The best muni bonds from any issuer are rated AAA. They are issued by state and local governments nationwide and their bonds have been deemed AAA by one of the major rating agencies. When a government runs into economic trouble, its bond ratings suffer (but it also will pay a better interest rate in order to attract buyers).After its 2013 bankruptcy, the city of Detroit missed payments on three of its general obligation bonds. That means it was responsible for three out of seven defaults on muni bonds rated by Moody's Investors in that year. The city has since managed to work its way back from a \"negative\" outlook to a \"stable\" outlook from S&P Global as of January 2021. Its outstanding debt was rated BB-.A bond rated AAA or close to it is one of the best municipal bonds. A bond issued by a local government that is teetering on the brink of bankruptcy is one of the worst. Investors who don't care to keep an eye on the finances of state and local governments they invest in can invest in a bond mutual fund or ETF. It will be managed by someone who gets paid to pay attention to these things.\"}},{\"@type\": \"Question\",\"name\": \"Are Municipal Bonds Safe\",\"acceptedAnswer\": {\"@type\": \"Answer\",\"text\": \"A municipal bond, or any bond for that matter, is safe as long as its issuer does not financially collapse. Luckily, that's highly unlikely in the U.S. bond market.The bond investor's best protection is to take care:Check the bond rating. Defaults are rare, but they happen. A rating of AAA, AA, or A indicates an issuer that is on a sound financial footing.Compare the real return on the municipal bond to other options for your money. It's always nice to save money on taxes but not at the cost of a better return for a comparable risk elsewhere, such as in high-quality corporate bonds.\"}}]}]}] Investing Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All Simulator Login / Portfolio Trade Research My Games Leaderboard Economy Government Policy Monetary Policy Fiscal Policy View All Personal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All News Markets Companies Earnings Economy Crypto Personal Finance Government View All Reviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All Academy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All TradeSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.InvestingInvesting Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All SimulatorSimulator Login / Portfolio Trade Research My Games Leaderboard EconomyEconomy Government Policy Monetary Policy Fiscal Policy View All Personal FinancePersonal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All NewsNews Markets Companies Earnings Economy Crypto Personal Finance Government View All ReviewsReviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All AcademyAcademy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All Financial Terms Newsletter About Us Follow Us Facebook Instagram LinkedIn TikTok Twitter YouTube Table of ContentsExpandTable of ContentsUnderstanding Municipal BondsReturns of Muni vs. Corporate BondsInterest Rate RiskPurchasing-Power RiskDefault RiskCall RiskMunicipal Bond Tax TrapsHow to Invest in Muni Bond FundsMunicipal Bonds FAQsThe Bottom LineIncome TaxInvestor TaxesThink Twice Before Buying Tax-Free Municipal BondsByThom Tracy Full Bio Twitter Thom Tracy is a contributor to Finance of America and HomeVestors. He has more than 1,000 published pieces on various financial topics.Learn about our editorial policiesUpdated July 10, 2022Reviewed byEbony Howard Reviewed byEbony HowardFull Bio LinkedIn Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries.Learn about our Financial Review BoardInvestors favor municipal bonds, or \"munis,\" for two main reasons. They are exempt from federal taxes, and they are relatively low-risk investments.
As of July 10, 2022, 10-year AAA-rated muni bonds returned 2.60% compared to 2.70% a week earlier. A 20-year AAA-rated bond returned 2.90% compared to 3.00% the week before. A 30-year AAA-rated bond returned 3.05% compared to 3.15% the week before.
You can lose the money you invest in municipal bonds if the issuer defaults. That risk is vanishingly small, considering that defaults on municipal bonds reached 0.05% of $3.9 trillion of outstanding debt in 2020, a time during which local tax revenues were decimated by the COVID-19 pandemic.
You also could lose money on muni bonds if you are forced to sell the bonds on the secondary market at the wrong time. The price you get will be determined by the total dollar amount of the remaining interest payments due, factoring in the prevailing rates available on new issues.
The best muni bonds from any issuer are rated AAA. They are issued by state and local governments nationwide and their bonds have been deemed AAA by one of the major rating agencies. When a government runs into economic trouble, its bond ratings suffer (but it also will pay a better interest rate in order to attract buyers).
After its 2013 bankruptcy, the city of Detroit missed payments on three of its general obligation bonds. That means it was responsible for three out of seven defaults on muni bonds rated by Moody's Investors in that year. The city has since managed to work its way back from a \"negative\" outlook to a \"stable\" outlook from S&P Global as of January 2021. Its outstanding debt was rated BB-.
A bond rated AAA or close to it is one of the best municipal bonds. A bond issued by a local government that is teetering on the brink of bankruptcy is one of the worst. Investors who don't care to keep an eye on the finances of state and local governments they invest in can invest in a bond mutual fund or ETF. It will be managed by someone who gets paid to pay attention to these things.
In addition, the IRS sets rules each year restricting the volume of tax-exempt PABs that can be issued by each state. For 2021, each state may only issue up to the greater of $110 per capita or $325 million. Therefore, very expensive projects that would be qualified PABs, such as building a new high-speed intercity train, may require issuance of some taxable bonds as well.
Taxable bond issuance surged again in 2019. From August 2019 to November 2020, between 15% and 40% of municipal bonds issued each month were taxable. In October 2020, borrowers issued $45.2 billion in tax-exempt municipal bonds and $25.1 billion in taxable municipal bonds. (In comparison, corporations issued $152.9 billion in bonds in the same period.)
One big reason is a provision of the 2017 Tax Cuts and Jobs Act, which prohibited the use of tax-exempt bonds for advanced refunding transactions, a refinancing maneuver we describe below. Previously, when interest rates declined, issuers of tax-exempt municipal bonds could issue a second tax-exempt bond to refinance their debt. Now, entities that want to use advanced refunding must issue taxable bonds.
With the 2017 Tax Cuts and Jobs Act, the city can only issue these refinancing bonds if they are taxable. However, current interest rates on taxable muni bonds are so low that the advanced refunding maneuver is still attractive. In the second half of 2019, nearly 80% of taxable bonds were used at least partly for this type of refinancing. 781b155fdc