Tax free bonds

[-JAW-]

Can anyone give me any information about "tax-free" investments? What are they? Where do you get them? How safe are they? What is the yearly return . . . etc.? And anything else you can tell me . . . Like at what income level do they make sense. What "taxable" return rate do you have to make to equal what you would get from a "tax free" investment?



:rybka:

[flatscat1]

Tax free bonds are usually municipal bond offerings which pay dividends that are exempt from federal (and often, state) taxes. It depends on which state you live in and which state the bonds are issued. Like all bonds, they carry varying degrees of risk which is determined by the rating of the issuing entity. Moody's and S&P are the primary rating agencies. It is too difficult to explain what the respective rating scales mean for each agency, but this info is easily available online. Regarding tax rates: You can determine whether tax exempt or taxable is best for YOU by doing some simple math.

Say your tax rate is 25% and a taxable bond (corporate or government) is paying 5% over a 1 year period. The net interest paid to you will be (.05 x .75 = 3.75%) This is the interest rate (.05) times the inverse of your tax rate (1 - .75 = .25)

If a municipal bond is paying better than 3.75% tax exempt, over the same time period and having the same or less risk (rating), then go with the muni.

Hope this helps a bit.