Ask Terry Questions Purchasing municipal bonds

Purchasing municipal bonds

By Terry Savage on May 09, 2018 | Investments

What is the difference in return and tax consequences between individual muni bonds and a muni bond fund?

Terry Says

The concept is the same -- municipal bonds are free from Federal income taxes, and also from some state and city income taxes in the state of residence.   But you need to choose bonds carefully, because they have different maturities and different credit ratings.   And it's not just a matter of tax-free yields.  BUT, there is another problem with buying individual municipal bonds.  The market for small amounts of bonds is very illiquid and opaque.  So you wind up paying a lot more to buy bonds, and getting a lot less when you sell them.   That's why you should probably buy a muni bond fund -- with the appropriate maturity and credit quality.  Just go to Fidelity or Vanguard and buy one of their muni bond funds after carefully reading the goals and description of each fund.

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