Things You Should Know: A Tax-Free Investment

Did you know that you can make a tax-free investment?

If not, you are not alone. Many people live under the presupposition that all investments are taxable in nature when in reality there are two main types of investments that are tax-free.

The two main categories of tax-free investments are:

1.    Municipal bonds & municipal bond mutual funds

2.    Tax-exempt money market funds

Municipal bonds are issued by state and local governments and are typically used to finance things like public projects, infrastructure repairs, schools, etc. They are generally free of tax because they are issued by an entity that is exempt from federal taxation, like a state or municipality.

Although municipal bonds are tax-exempt, there are a few things you have to be wary of with them. One thing to remember is that if you are to purchase a municipal bond, it must be inside your state of residence, or you will potentially face both state and local taxes on it. It's also important to remember that if a municipality issues a bond that does not qualify for a federal tax exemption, then the income will also be subject to federal taxes. You also need to remember that if you sell a tax-exempt bond for profit, then you will have to pay capital gains.

The second type of tax-free investment comes from tax-exempt money market funds. A money market fund is a mutual fund that invests in money market instruments, which translate to cash or cash securities. These money market funds are known for being short-term investments, that yield high credit quality. 

Typically, money market funds invest in CDs, commercial paper, U.S. Treasuries, and Bankers' Acceptances. These funds are useful to many investment portfolios, but knowing how they work is essential to each investor.

If you are to invest in either municipal bonds or money market funds, it is crucial to know the pros and cons of each option. In our next blog post, we will discuss different investments that can help you attain a long-term profit. 

Have questions on what you should invest in? Contact us for more info!