If you've got money in a checking or savings account, you know how stingy banks are about giving you the interest you deserve. But with many alternatives to bank CDs paying even less in income, many people who depend on drawing money from their investments have been struggling to make ends meet.
But one income investment has actually gotten more attractive recently. Yet because it's perceived as being strictly for rich people, many ordinary Americans never think twice about it.
Right now, municipal bonds could be the answer for many folks trying to make their money work harder for them.
How Muni Bonds Work
Municipal bonds look a lot like other kinds of bonds. State and local governments issue muni bonds in order to finance a variety of public projects, ranging from general budget outlays to specific uses like building sewers or schools. In exchange for getting money up front, the government pays investors regular interest payments and promises to return the money at a set date in the future.
The big advantage that muni bonds have is that their interest is exempt from federal income tax. Unlike regular bonds, upon which interest gets taxed at rates as high as 35%, muni bonds let investors keep every penny they receive.
The trade-off for muni bond investors is that they usually have to accept much lower interest rates than traditional bonds. Because high-income investors get more value from the tax break on muni bonds, they're a favorite investment for the rich.
An Unusual Opportunity
Recently, rates on municipal bonds have been very close to those of taxable Treasury bonds. As a result, even those who pay only modest tax rates on their income could see an after-tax benefit from investing in muni bonds.
Those attractive rates don't come without risk, however. The recession hurt tax revenues for many state and local governments, putting their creditworthiness in jeopardy. Some experts believe that a number of governments could default on their muni bonds. Because the bonds aren't insured by the federal government, that could leave investors facing a potential loss of their principal.
But for those willing to take on some risk, the added income could be enough extra reward. With mutual funds and ETFs giving you easy access to a wide range of muni bonds, taking a closer look at how muni bonds could boost your income makes a lot of sense right now.
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