07 Aug Should I invest in tax-free municipal bonds?

Q. My wife and I are retired and she is taking her mandatory withdrawals from her IRA and 457 accounts annually. We don’t need the money to pay current bills and we are looking for a relatively safe investment that pays more than a bank CD. We are thinking of investing in a tax-free municipal bond fund. Is this a good idea?
— Retired

A. We’re glad to hear you’re in good financial shape and you don’t need your wife’s required minimum distributions to cover your expenses.

There are several factors to consider when investing in a tax-free municipal bond fund.

One of the first considerations is what tax bracket you are currently in and if you really need the tax-free income, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.

You’ll need to do some math to see if a corporate bond fund would give you a higher income amount after tax, he said. If you are in a low tax bracket, it may be more beneficial to look at corporate bonds.

Van Leeuwen said one common misconception is that bond funds are low-risk investments.

“While the volatility of bonds is usually less than the stock market, there is still interest rate risk and there could be a decline in value of the fund if interest rates begin to rise,” he said.

You would want to look at the “duration” of the fund to see how interest rate sensitive the investment may be, he said. Typically, the lower duration funds are less interest rate sensitive but may offer lower income while higher duration funds may offer higher rate of income, but come with more interest rate risk.

“Investing in tax-free municipal/state or corporate bond funds may pay more income, but certainly come with more risk than an insured CD from a bank,” he said.

Consider having a conversation with a financial advisor who can look at your overall financial situation before you make a decision.

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This story was originally published Aug. 7, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.