It’s never a bad idea to keep adding to your retirement income in case of any surprise costs, but adding to your tax burden can add unnecessary stress. Taking a look at this tip will help boost your retirement savings without adding to your taxes.
During retirement, it’s a good idea to focus on investments that aren’t particularly risky or volatile, and in that regard, municipal bonds fit the bill. Municipal bonds are those issued by cities, states, or other localities (whereas corporate bonds are issued by companies to raise capital). A city might issue municipal bonds to construct a new road, revamp its parks, or build a community center.
As is the case with all bonds, when you buy municipal bonds, you’re effectively loaning the issuer some money for a present period of time in exchange for interest payments that are made to you twice a year. Once your bonds come due, you’re entitled to your principal in return. It’s those interest payments, however, that generally trigger an extra tax bill, but with municipal bonds, they be avoidable completely.
The interest you collect on municipal bonds is always tax-exempt at the federal level. Furthermore, if you buy municipal bonds issued by your state of residence, you’ll avoid state and local taxes on those interest payments as well. Or, to put it another way, if you invest in municipal bonds that pay you $500 a year in interest, that $500 will be yours to keep in full.
Now to be clear, the tax-exempt status of municipal bonds refers to their interest payments alone. If you sell your municipal bonds at a profit, you’ll still be subject to capital gains taxes, the same way you would if you were to sell off some stock at a share price that’s higher than what you paid. But collecting those steady interest payments tax-free could make for a much more comfortable retirement, and so it’s worth adding some municipal bonds to your portfolio.”
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