Which bonds are tax free?
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes.
Municipal bonds are federally tax-free and, in some buying a bond is basically extending a loan to a "borrower." In the case of municipal bonds (also known as "muni bonds"), the borrower is a city, county, state or school district.
- Report interest each year and pay taxes on it annually.
- Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
Municipal bond funds invest in securities issued by municipalities, which are often exempt from federal taxes and, in some cases, state taxes for residents of the issuing state.
Municipal bonds generally carry less risk than stocks and are tax-exempt, which for higher tax-bracket investors effectively increases the return rate. It's crucial to highlight though, that they may not be the best choice for everyone and should be considered in light of personal financial circ*mstances.
Treasury bonds and Series I bonds (savings bonds) are also tax-efficient because they're exempt from state and local income taxes. 89 But corporate bonds don't have any tax-free provisions, and, as such, are better off in tax-advantaged accounts.
CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|---|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest. Only taxable accounts are allowed to invest in I bonds (i.e., no IRAs or 401(k) plans).
In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.
How do you know if a bond is tax-exempt?
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes. Municipal bond income is also usually free from state tax in the state where the bond was issued.
Tax-Exempt Interest. Interest on a bond that is used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a U.S. possession, or any of their political subdivisions.
Both general obligation bonds and revenue bonds are tax-exempt and low-risk, with issuers very likely to pay back their debts.
Alternatively, if the bondholder sells the bond and there is a gain, they are subject to capital gains tax. Also, when bonds are purchased at a discount on the secondary market, capital gains tax may apply when the bond is redeemed.
What are the disadvantages of bonds? Although bonds provide diversification, holding too much of your portfolio in this type of investment might be too conservative an approach. The trade-off you get with the stability of bonds is you will likely receive lower returns overall, historically, than stocks.
Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.
Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.
Tax-free retirement strategies include contributing to a Roth IRA, using a Health Savings Account (HSA), purchasing municipal bonds, capitalizing on long-term capital gains rates, owning a permanent life insurance policy, using annuities, and considering the tax implications of your Social Security benefits.
An investor would be better off rolling over 6-month Treasuries yielding ~5.4% than buying a 5-year CD yielding 5.4% that becomes callable starting in 6 months. Buying the 6-month Treasury would allow the investor to reinvest at a higher interest rate upon maturity if interest rates rise.
CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.
What bonds to invest in 2024?
| Rank | Fund | Yield |
|---|---|---|
| 1 | Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) | 6.40% |
| 2 | T. Rowe Price High Yield Fund (PRHYX) | 7.02% |
| 3 | PGIM High Yield Fund Class A (PBHAX) | 7.22% |
| 4 | Fidelity Capital & Income Fund (fa*gIX) | 6.16% |
Series EE savings bonds are a low-risk way to save money. They earn interest regularly for 30 years (or until you cash them if you do that before 30 years). For EE bonds you buy now, we guarantee that the bond will double in value in 20 years, even if we have to add money at 20 years to make that happen.
| Total Price | Total Value | YTD Interest |
|---|---|---|
| $1,000.00 | $2,094.00 | $89.60 |
U.S. Savings Bonds mature after 20 or 30 years, depending on the type of bond: Series EE bonds mature after 20 years. They are sold at half their face value and are worth their full value at maturity.
Bottom line. I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.
