How Do Tax Free Bond Funds Work

And you can save even more if you live in a state that offers similar exemptions.

How do tax free bond funds work. You have no debt own your home outright and have built up 500 000 in savings over a long work career. Municipal bonds are one of the safest long term investments. The corporate bonds yield 7 and the tax. You have a choice between investing in general corporate bonds or tax free municipal bonds.

Tax free bonds are a fixed income instrument carrying a coupon rate of interest and is issued for a fixed tenure. Say you are looking at a tax free municipal bond for riverside california rated aa by standard poor s p and aa2 by moody s it matures on aug. Municipal bonds are good for people who want to hold on to capital while creating a tax free income source. Example of calculating after tax bond income.

1 2032 but it is callable so the yield to maturity of 2 986 is higher than the yield to worst which is 2 688. Bond funds work differently from bonds because mutual funds consist of dozens or hundreds of holdings and bond fund managers are buying and selling the underlying bonds held in the fund. As the name suggests interest earned from tax free bonds is exempt from tax. The interest generated by bond funds is typically calculated daily but paid out to investors monthly.

But in early 2008 something happened that s only occurred in the u s. Because they re so secure they usually carry interest rates that average a percentage point or two below the going rate for treasury bills. What are they how they work and how to choose the best tax free bonds. Municipal bond income is exempt from federal and state income taxes.

In simple terms irrespective of the income slab one need not pay any income tax on the interest income. Tax free mutual funds have many of the same advantages as their taxable cousins. How that income is taxed depends on the underlying investments that are generating that income. Learn about tax free bonds.

How tax free mutual funds work. The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. General obligation bonds are issued to raise funds right away to cover costs while. As the name suggests interest earned from tax free bonds is exempt from tax.

Some of the public undertakings which raise funds through the issue of tax free bonds are irfc pfc nhai hudco rec ntpc and indian renewable energy. However when an investor holds single bond securities the investor has control over the selection of the securities and the timing of purchase and sale. But they also have a few drawbacks including lower earnings proportionally higher fees and despite the name some tax liabilities. Read on to learn what goes into a tax free mutual fund and if.

Twice since 1990 the interest rate for municipal bonds crept higher than for treasury bills source. In this case for the sake of conservatism we ll assume the yield to worst actually.