Denton County Living Well Magazine Spring 2014 | Page 37

Municipal Bonds May Be Good For Your Portfolio

I

Courtesy of Barlow Capital Advisors
f your investment portfolio consists of only equities, you may want to diversify. Stocks and other
equity securities are an important part of your investment mix, but you may also want to consider
some fixed income investments like municipal
bonds. Income is generally free from federal taxes and
state taxes for residents of the issuing state, however capital gains, if any, will be subject to taxes. Income for some
investors may be subject to the federal Alternative Minimum Tax (AMT).
When you purchase a new-issue municipal bond, you actually make a loan to the issuer, which may be a city, township or school district, for example. These entities use the
funds raised from the sale of bonds to finance new streets,
water and sewage systems, hospitals, parks,
and many other improvement projects. In
return for the use of your money, the issuer
promises to pay you not only the principal
amount back when the bond matures, but
also a set interest rate, or coupon, during the
term of the bond.
For many investors, the most favorable
aspect of municipal bonds deals with the
federal-tax-free income they offer. Investments must offer a substantially higher rate
of return to be able to match the after-tax
return available on a municipal bond. For
example, if you are an investor in the 33%
income tax bracket, you would have to find
a taxable bond paying 7.46% to achieve the
same after-tax return as what you would get
from a municipal bond yielding 5%.
High-quality municipal bonds also provide a range of interest rates at various maturities, to help you plan for short-term or
long-term income needs. To illustrate, if municipal bonds
priced near par value were providing coupon rates ranging from 2% to as much as 5%, you would receive from $20
to $50 per year federally tax free for each $1,000 principal
bond you own. Depending on which bonds you choose, you
can plan for income now and in the future as municipal
bonds are issued with various maturities ranging from one
to 30 years.
It is also important to note that municipal bonds typically
have very low default rates. According to the Bond Market
Association, less than 1 percent of municipal bond issues
sold since 1940 have gone into either ѕ