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Tax Free Bond Funds

Bond Funds

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Tax free bond funds purchase bonds with tax exemptions under specific circumstances. When purchasing these bonds, they ensure that these conditions are met, providing tax free income for the fund shareholders. These usually consist of American municipal bonds within the same state. A person buying a Florida municipal bond fund may receive tax exemption if they live in Miami, Florida and possibly federal level United States taxation. Depending on the state laws of Florida, they may receive tax freedom at the municipal, regional, and national level.

Within the United States of America, all municipal bonds receive exemption from national level income taxation. Some receive exemption from the state, and some receive exemption from the city if you reside in the city that issued the bond. These same rules extend to bond funds. Purchasing a municipal bond fund within the state you claim taxes is extremely wise if you are within a high taxation bracket or pay state income tax.

These funds are weak for diversification purposes. Since they concentrate their investments within a specific region, if that region suffers economically the entire fund suffers. If any event which strongly reduces taxation across those states occurs, the fund may potentially be looking at a sudden wave of defaults. You can resist this problem by buying into Municipal bond funds that work across the entirety of the United States, but note that you will not receive tax freedom at state and local levels from that particular bond fund.

The same rules that apply to tax free bond purchases also apply to tax free bond funds. You should never keep these bond funds in tax free or tax advantaged accounts. You want these to be taxed, since they are exempt or reduce taxation. You do not need a tax shelter for an investment that is already tax sheltered. Place regularly or heavily taxed bond funds within your tax advantaged retirement or investment accounts.

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