| Municipal bonds (munis) have been around for | | | | Let's say that you are in the 25% tax bracket, |
| years and offer investors interest income that is | | | | which means that in 2008 your taxable income |
| tax-exempt, free from federal income taxes. This | | | | was over $65,100. You want to invest $10,000 |
| is important to many bond investors, because | | | | into a bond fund. You find a high-quality taxable |
| they buy bonds for the higher income they pay | | | | bond fund that will pay 6% in dividends, or about |
| vs. CDs and savings accounts. Municipal bond | | | | $600 a year. After paying 25% to the IRS, you |
| funds invest in munis. Hence, if you buy the fund, | | | | net $450, or 4.5%. You pay tax on the interest |
| you are invested in municipal bonds and receive | | | | (dividends) whether you receive it or simply allow |
| dividends that are free of federal income taxes. | | | | it to reinvest and buy more shares in the fund. |
| Municipal bonds are issued by states and local | | | | In the 25% tax bracket, if you can find a muni |
| government entities to raise capital (money) for | | | | bond fund that pays over 4.5% tax-exempt, it is |
| major projects. The U.S. government gives them | | | | to your advantage to invest in it. The higher your |
| a break by not levying income taxes on the | | | | tax bracket, the greater the advantage. If your |
| interest they pay to investors. This makes it | | | | taxable income was over $200,300 in 2008, for |
| easier for the state of Ohio, for example, to sell | | | | example, you were in the 33% or 35% tax |
| bonds and raise money. It also allows the state to | | | | bracket. A 6% taxable bond fund would have left |
| pay a somewhat lower interest rate than a | | | | you with only about 4% net after taxes. |
| corporation with a high credit rating would need to | | | | Second, mutual fund expenses and sales charges |
| pay to attract investors. | | | | only work against the investor. On a $10,000 |
| When you invest in a municipal bond fund | | | | investment, a 3% sales charge (load) can take |
| professional money managers manage a | | | | $300 off the top, and yearly expenses could be |
| diversified portfolio of munis for you. Some fund | | | | .5% or more per year. Or, if you go with a major |
| families offer funds that are double tax-exempt. | | | | no-load fund family, a municipal bond fund |
| For example, an Ohio Tax-Exempt Bond Fund | | | | investment has zero sales charges, and yearly |
| would pay Ohio residents dividends free from | | | | expenses can be as low as .15% a year. |
| both federal and state income taxes. | | | | Third, all bonds and bond funds are subject to |
| There are three factors you should consider | | | | interest rate risk. This means that if interest rates |
| before investing in any muni bond fund. One, your | | | | go up, the value or price of bonds and bond funds |
| tax bracket. Two, expenses. Three, interest rate | | | | that invest in them will fall. |
| risk. | | | | |