The 19 Sources of Retirement Income: Municipal Bond Dividends
In this episode, John continues his series on the 19 Sources of Retirement Income. He focuses on yet another way to add tax-free income to your retirement plan: dividends from municipal bonds.
Don’t miss John’s takeaways:
- When most financial planners talk about tax-free income, they’re referring to municipal bond dividends.
- When you purchase municipal bonds, you are in effect lending money to the government. Interest is the payment you receive for the use of your money. When you lend it to a bank, a corporation, a government, an individual, or a business.
- Most municipal bonds are tax-free at the federal level.
- Exceptions include private activity bonds that are subject to the alternative minimum tax. So, always check what you are buying.
- Municipal bonds are part of a strategy to have multiple income sources in the center of your 1040 tax return: Line 2A is tax-exempt interest income, Line 2B is taxable interest income, Line 3A is your qualified dividends, and Line 3B is ordinary dividends.
- Getting the right mix of taxed and tax-free income streams in your portfolio can reduce your overall taxation. For example, if your ordinary dividends are taxed at the highest tax bracket, moving some of that to municipal bonds could dramatically reduce your tax bill.
In a rising tax environment, municipal bonds are extremely valuable. Tax-free dividends reinvested into a municipal bond portfolio can be a powerful creator of wealth.
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