One of the least used options when it comes to investment income is Municipal Bonds. The advantage of these investments is that they are currently not federally taxable and if you invest in your state’s muni bonds, then they are generally not taxable by the state either.
This means that your savings will vary depending on your tax bracket and thus will be more significant as your income rises.
In the past municipal bonds were considered a very safe investment. Unfortunately in today’s uncertain financial climate, it’s hard to tell if the municipal bonds are as secure of an investment as they once were. Though the earnings continue to be tax-free, it’s impossible to tell if cities or other municipalities might default in which case you may lose a significant portion of your original investment.
Municipal bonds often have minimum buy ins of at least five figures. This can be a barrier to entry for many smaller investors; however there are funds that specialize in a portfolio of municipal bonds. Contact your investment advisor for more information on these options.