Tax-free bonds, when compared with corporate investments, have turned out to be less risky investments than several others because there is no need to pay a number of state or federal taxes.
Also known as municipal bonds, these bonds are very lucrative opportunities for monetary gain for the investor who is eager to invest in projects that come with no taxes whatsoever.
But there is a lot more to these tax free investments than what meets the eye, which is why it is important to take an analytical perspective with regard to tax free bonds.
Here is an informative guide on tax-free bonds and what they are generally about.
These tax free investment alternatives are also known as municipal bonds because they are mainly issued by municipalities and local governments.
They were originally endorsed in order to assist local government and agencies in their attempts to raise money for various regional developmental projects.
As it turns out, they are one of the easiest ways to obtain the much needed capital for extensive developmental projects.
The main reason behind their popularity is the simple fact that they are easy to repay.
This alone makes them very reliable investments because repayment can always be guaranteed.
However, this does not mean they are completely perfect.
Just like any other bond or loan, the rates at which they are given always fluctuate according to market trends and conditions.
And it is not just changing market trends that determine fluctuations and differences in loaning rates.
Different municipalities operate under different interest rates as determined by different state laws governing lending and borrowing agreements.
So these 'safe investments' might not always be safe everywhere you go, there might be a differences that might affect your decisions at the end of the day.
The use of a professional bond broker is always advised for choosing the best tax free investments.
At first glance, interest rates on municipal bonds do not always compare favorably to corporate bonds.
However, if one considers the tax implications, municipal bonds often offer a higher yielding investment option than corporate bonds.
For instance, imagine comparing a corporate bond with a 7% yield and a municipal bond with a 4.
5% interest rate.
Initially, the corporate bond looks like a much better investment.
Now consider the tax implications.
The corporate bond will often be taxed at a 35% federal rate, and a 5% state rate for income taxes.
This knocks the actual interest rate earned down by 40% - to an actual 4.
2%! This is actually lower than the municipal bond that pays out 4.
5% tax free! If you look at a $100,000 investment for 1 year, a corporate bond earning a 7% taxable yield will net the investor $4,200.
A tax-free municipal bond earning 4.
5% will net the investor $4,500 for the same period.
Municipal bonds often offer rates as high as 6%.
This is tax free growth.
This is where banks and millionaires invest their money.
When you get 1% on a CD (certificate of deposit) or a savings account from a bank, the bank is usually making 5 or 6 times that amount in interest - on your money! Smart investors choose municipal bonds.
Because the choices are often confusing and the market can be difficult to navigate, it is usually easiest to use a bond broker to purchase municipal bonds.
Although the broker will charge you a small fee for their services (as low as 1%), you will still end up way ahead of simply leaving your money in a savings account or CD.