Are you tired of having to pay taxes on your savings and investment accounts in addition to your earned income? Regardless of your tax bracket, one of the only remaining means of tax-free investing is municipal bonds.

The goal of any investor should be to maximize after-tax return that is consistent with the amount of risk he or she is willing to take. Most municipal bonds continue to pay interest that is exempt from federal income taxes. (Although municipal bond interest may be subject to the alternative minimum tax.) And in many cases, states and cities also allow an exemption on interest earned on their own issues. As a result, investors can often get higher returns after taxes than they can get from comparable taxable investments.

Tax Benefits

As noted in the chart, higher tax rates make the taxable-equivalent yields of municipal bonds more attractive, which, as a result, should increase the demand.

Safety

Municipal securities have an excellent record of paying interest and principal on time. The relative quality of municipal bonds can be determined by the rating provided by the two major rating agencies: Moody’s Investors Service Inc. and Standard & Poor’s Corporation.

Generally, bonds rated AAA, AA, A or BBB are considered to be investment grade or suitable for preservation of invested capital.

Flexibility

Municipal bond investors can choose any desired maturity date from one to 30 years or more. Because of this flexibility, investors can use municipal bonds to plan for current and future financial needs.

Types of bonds

A wide variety of municipal bonds are issued from virtually every city and state to finance such projects as schools, roads, airports and sewer facilities.

The categories of bonds range from general obligation, which typically carry superior credit ratings with corresponding lower risk and yields, to revenue bonds, which generally provide greater returns than general obligations bonds.

There are also insured bonds for additional protection and zero coupon issues that are especially suited for building a retirement fund or college savings. Insured bonds guarantee the timely payment of interest and the return of principal at maturity, but the insurance does not remove the market risk and the bond’s value may fluctuate.

Municipal bonds are easy to purchase individually in minimum denominations of $5,000 and do not require a prospectus.

Or you can also purchase municipal bonds by investing in municipal bond mutual funds and unit trusts. Bond mutual funds or unit investment trusts offer tax-free compounding and may also offer diversification and a lower minimum investment.

These investments are sold by prospectus, which includes fees and expenses, which, of course, you should read carefully before you invest. Mutual funds and UITs are subject to market risk and therefore the potential loss of principal.

To find out more how municipal bonds can help ease the tax bite in your portfolio, consult your financial advisor.

Marc A. Pellerin is an associate vice president and investment advisor with Advest Inc. in Lewiston.