Most people’s goal is to have a decent amount saved up in their retirement account and then support it with Social Security benefits. However, generating extra income during your retirement years is never a bad idea.
It’s challenging to correctly estimate your medical bills or home repair bills in the later years. There’s always the tendency of unexpected expenses creeping out of nowhere, and the more income at your disposal, the less stress you’ll have.
That said, having multiple income sources in retirement can give the IRS more opportunities to come after your money. Typically, your Social Security benefits and retirement withdrawals that don’t come from a Roth savings account are subject to taxes. Pension payments and interest income are also subject to tax.
But what if there was a way to boost your retirement income without increasing your tax burden? Yes, there’s a solution that allows you to achieve just this; it’s called municipal bonds.
Why Municipal Bonds?
During retirement, expert advice focuses on investments that are less volatile or risky. Municipal bonds perfectly fit the bill. Municipal bonds are issued by cities, states, or other localities. They are often issued to raise funds to undertake specific public projects like road construction, park building, or the addition of community centers.
There’s also the corporate bond that is issued by companies to raise capital for projects or expansion.
As it is with other bonds, when you invest in municipal bonds, you’re loaning money to the issuer to be repaid at a future time in addition to the interest that is usually paid twice a year. Once your bond is due, you’ll be paid your principal in return. However, it’s the interest that attracts the taxes, but this can be avoided entirely with municipal bonds.
The interest you get from municipal bonds is always exempted from tax at the federal level. Additionally, if you buy municipal bonds from your state of residence, you can avoid state and local taxes on the interest earned. So if you put your money in municipal bonds and earn $1,000, the whole $1,000 will be yours to keep.
Collecting these tax-free interests can make a difference in the funds you’ll have for retirement. However, it’s important to note that municipal bonds’ tax-exempt aspects only apply to the interest earned. If you sell your municipal bonds for a profit, you’ll be required to pay taxes on your profit like you’ll do when you sell shares for an amount above what you paid for it.
Keep the IRS Away
Taxes are a burden during your working and retirement days, especially when you have limited income. With municipal bonds, you won’t have to worry about taxes. You will be able to sit back and collect your interest twice a year without worrying about the IRS until it’s time to file your returns.