Tax-Free Investing for Your Future

With taxes potentially on the rise, now may be an ideal time to consider adding a tax-free investment to your portfolio. One option is a tax-free bond fund, which invests primarily in municipal bonds. Municipal bonds are debt securities issued by a state, municipality, county, or special purpose district (public schools, airports, etc.) to finance capital expenses. Municipal bond yields are quite attractive right now compared with other less tax-friendly investments. Even Treasury bonds, which are exempt from state and local taxes, are not exempt from federal taxes. Municipal bonds on the other hand, are usually federal tax free.

The unprecedented market events of 2008 actually left many municipal bonds undervalued, creating opportunity for investors to buy these bonds at a discount. In addition, due to the prospect for increased bank purchases of municipal bonds under the Obama Administration, now may be the perfect time for tax-conscious investors to consider municipal bond funds.

Retirement Income
Nothing is more important for a secure retirement than establishing regular, steady sources of income. Luckily, there are many income-producing investment products available to today’s retirees, municipal bond funds being one of them. A primary benefit of these funds is that they can offer monthly income through tax-free dividends.

In addition to providing tax-free income, municipal bond funds are an ideal choice for retirement for other reasons. Historically, municipal bonds have been less risky than other fixed-income investments, with lower default rates and higher recovery rates than taxable bonds. Of course, past performance is no guarantee of future results.

The Tax Free Way to Achieve Your Goals
It’s important to note that while municipal bond funds are a good fit for retirees seeking steady income, they can also be suitable for other investors who are looking for a more conservative investment or alternatives to the real estate and equity markets. Municipal bonds’ favorable tax status also makes them attractive to high net worth individuals as a way to preserve their wealth.

Not only can municipal bonds provide tax-free current income, but there is also the potential for future growth. For those investors who do not need income, monthly dividends can be reinvested. When investment returns aren’t reduced by taxes each year, more earnings remain in the account, where they can compound, helping investors generate wealth or reach goals such as funding college, purchasing a home, or retiring. Of course, you should consult with your financial or tax advisor, as capital gains may be taxable upon the liquidation of your accounts.

Finally, if there’s one lesson the financial crisis has taught us, it’s that it is important to stay diversified. The municipal bond asset class provides investors with fixed-income diversification, as municipal bonds typically have a lower correlation to taxable corporate debt and even U.S. Treasury securities.

If you think a municipal bond fund is right for you, contact your financial advisor or MainStay Investments at 800-MAINSTAY (624-6782) to learn more about MainStay Tax Free Bond Fund.

Tax-Free Solution — Keep More of the Income
Looking at a hypothetical one-year return for a $100,000 investment, an investor could have generated: