100% Tax-Free Passive Income | Investing in Municipal Bonds

In this video, I explore municipal bonds as an investment option for tax-free passive income. But is it worth passing up on other investments for? I'll show you how to find out!

00:00 - Intro
1:03 - Discussing Income Tax
3:05 - Discussing the Capital Gains Tax
4:56 - Municipal Bonds as an Investment for Tax-Free Passive Income
5:57 - Are Municipal Bonds Worth It? Calculating Tax-Equivalent Yield
7:36 - How I Am Investing in Municipal Bonds for Tax-Free Income

Taxes are a BIG and UNAVOIDABLE cost when it comes to investing and building passive income. Before we can discuss tax-free passive income, we have to have a clear understanding of how taxes affect our other investments.

First, you have to look at income tax, and where it costs you money outside of your traditional income. Income tax also applies to the sale of stocks when you earn a short-term capital gain. The tax will also apply to unqualified dividends, as well as qualified dividends when you fail to hold a stock for its dividend holding period. Income tax also applies to interest - this means you are taxed on the returns bond investments and any interest you earn from bank accounts.

Next, you have to consider the capital gains tax, which is more favorable but still a very important number to consider. The capital gains tax applies to properties, stocks and qualified dividends - as long as you've held those assets for at least one year. Generally, if your investments are going to be taxed at all, you want them to be taxed at the capital gains tax rate!

Investors looking for tax advantages often start with 401ks or IRAs. But, these aren't entirely tax free, and you have to wait many years to enjoy the fruits of your laborious investing. So where is this tax-free option?

Tax-free passive income is only possible through #MunicipalBonds, also called munis or muni bonds. These are essentially loans that you lend to local governments, helping them fund public works like construction. Municipal bonds are typically exempt from federal taxes, and in most cases, they're exempt from state and local taxes, too. These loans are backed by the government, offering the lowest default rate of any bond category. So why isn't everyone investing in them?

Well, to determine the true benefits of tax-exempt municipal bonds, you have to compare their returns to the returns that you could find elsewhere (even in taxable assets). For this, you use the tax-equivalent yield formula, which quantifies the average return you'd need to get in a different asset in order to earn better returns than the tax-free income from a municipal bond. And this is the number that will help you decide if tax-free #PassiveIncome from municipal bonds is your best bet. Typically, those in higher tax brackets will benefit the most from municipal bonds. Those earning an average income, like myself, might just be better off #investing in taxable assets with higher returns.

What about you? Tell me if municipal bonds make up any of your portfolio! Given the terrible interest rates of savings accounts, I'm eager to move my "emergency fund" into municipal bonds. Let me know if you plan to use them in a similar manner!

If you want to get started with investing in municipal bonds (or investing in general), I highly recommend M1 Finance! It's my personal favorite investing app with ZERO commissions, ZERO fees, and automatic reinvesting (great for dividend investors). Sign up here to get $10 free!
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DISCLAIMER: NOT FINANCIAL ADVICE.
The content in this video should not be used as the basis for any investment decision. I am simply sharing my learnings from my research into municipal bonds. I am not a financial advisor, so I encourage you to do your own research and discuss your goals with a financial professional to determine if municipal bonds are appropriate for you. I have done my best to ensure that the information provided in this video is accurate, but it does not paint a full picture of the investment landscape. Again, I encourage you to develop your own knowledge on these subjects before making any investment decisions. Additionally, some of the links contained in this description are affiliate links. I may earn a commission via M1 Finance should you choose to purchase or sign up at the links provided.