Are tax-free muni bonds right for your portfolio? What to know before investing

Are tax-free muni bonds right for your portfolio? What to know before investing

If you're looking for a relatively safe, tax-friendly asset, you may be eyeing municipal bonds, known as muni bonds or "munis." Demand soared in 2021 as investors fled from 's , with a record $96.8 billion of net money pouring into U.S. muni mutual and exchange-traded funds, according to Refinitiv Lipper data. Since rising market interest rates typically , some investors worry about the Federal Reserve's . But muni bonds are still a good option for certain clients, advisors say. One of the primary benefits of muni bonds is safety. "I like muni bonds as a place for clients to park their money," said certified financial planner Jordan Benold, partner at Benold Financial Planning in Prosper, Texas, explaining how it's a good spot for funds awaiting other opportunities. Indeed, muni bonds tend to be less risky than their corporate counterparts, with 113 muni bond defaults out of 13,140 issuers from 1970 to 2019, according to Moody's, a bond rating company. The other draw is you can generally avoid federal taxes on interest and may skip state and local levies, depending on where you live. For example, higher earners in California may save more than retirees in Tennessee, an income-tax-free state.