What Are Tax-Free Bonds?

For more than 20 years, Arizona-based retirement planner Darcy Bergen has been giving advice on wealth management and tax planning to his affluent clients. As a Certified Retirement Financial Advisor, Darcy Bergen helps his clients develop personalized plans for their retirement through well-timed IRA conversions and municipal bonds.

People nearing retirement often turn to low-risk opportunities such as municipal bonds to reduce their exposure to market volatility. Municipal bonds are issued by state and city governments to raise large sums of money, usually to finance infrastructure projects. Generally, bondholders are paid out interest over the term of the bond and returned the principle after the bond matures.

Unlike with corporate bonds, the interest earned on municipal bonds is exempt from federal taxes. In some circumstances, bondholders can also avoid being taxed at the state level. Municipal bonds are considered low-risk because the issuing government can leverage various taxes to repay its lenders. 

These bonds typically earn lower rates of return than stocks and other financial products. Additionally, any capital gains from selling a bond are subject to taxes.

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