Why invest in tax-free municipal bonds?

Has your financial advisor every mentioned municipal bonds?

Municipal bonds (munis) are attractive to many investors because the interest you earn from them is exempt from federal income tax and sometimes from state and local taxes as well.

So what is a muni bond?These are bonds issued by cities, states, or localities to raise money for public projects or to provide funds for public services. You invest a certain amount into an individual bond, collect your interest income, and get your investment money back when your bond comes due (matures).

You can also invest in muni bonds through a mutual fund or an exchange traded fund.

If you are in a higher tax bracket, investing some of your money into muni bonds can help to reduce your tax burden.