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Municipal Bonds Vs. Savings Bonds

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Bonds are investments often sought by retirees and other investors looking for a steady income stream or as a way to diversify a portfolio of stocks.

Both municipal bonds and U.S. savings bonds offer up great tax advantages, and a low to moderate amount of interest.

 

Savings Bonds

 

History

President Franklin D. Roosevelt signed a bill offering the first U.S. savings bond in 1935. The Series EE bond also helped provide financing for World War II. The majority of municipal bonds were issued at fixed interest rates until the end of the 1970s.

 

Types

Types of savings bonds include Series I and EE and Treasury bonds. Series I bonds are bought at the full face value amount (listed on the bond certificate) and earn interest and provide protection from inflation.

Treasury bonds are issued in 30-year terms and pay fixed interest every six months. Municipal bond types are revenue or government obligation bonds. GOs (Government obligation) bonds are issued by state and local governments.

 

Time Frame

Investors looking to invest in both savings bonds and municipal bonds should have an investment time frame of five to 18 years.

Bonds are known as conservative investments and often have less market fluctuations than stocks. You cannot redeem savings bonds unless six months has passed.

 

Benefits

Investors who are often in higher tax brackets would benefit more from investing in municipal bonds since the interest from municipal bonds is usually exempt from federal, state and local taxes. Investors residing in a high tax state could save on both federal and state income taxes by investing in municipal bonds issued by that particular state.

The earnings from U.S Savings bonds (Series EE and Series I) grows tax deferred and is exempt from state and local taxes. When the funds are withdrawn and used for qualified college expenses, the earnings could be federally tax free if you meet certain eligibility requirements.

 

Considerations

The risks associated with investing in municipal bonds are default risk, call risk and interest rate risk. Default risk involves the chance that a corporation or the government could default on their interest payments.

Call risk is when a bond is prematurely paid off or called at its face value. Interest rate risk involves a potential loss if interest rates rise. Municipal bonds sometimes have an inverse relationship with interest rates. When interest rates rise, bond prices tend to drop. U.S. Savings bonds are issued by the Treasury Department and have no default risk or call risk.

 

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