Usually in the financial industry, when something seems too good to be true, it is. What if I told you that there is an investment where you won't be forced to pay federal or state taxes on the interest received? Clearly, this has to be too good to be true, but for us New Yorkers, it isn't. For residents of New York State investing in bonds issued by municipalities like the New York State Thruway, Spencerport Central School District, or Long Island Power Authority, you will receive tax-free interest. New York State bonds are issued in two types: General Obligation Bonds and Revenue Bonds.
General Obligation bonds are secured by the full faith and credit of New York State and its unlimited taxing power. Revenue bonds are secured by specified taxes or other revenues pledged to make principal and interest payments. Public projects financed by revenue bonds are toll roads, bridge systems, hospitals, and dormitory authorities.
Consider investing $100,000 into a Chase Bank Certificate of Deposit (CD) for 36 months. You can expect a rate of 0.40%, $400 per year, which you will have to pay taxes on, or you could invest $100,000 into a Monroe County Industrial Development bond, maturing in 2017, paying over $4,200 in annual interest, completely tax-free to you, the investor.
Before jumping into a new investment, be sure to consult with a financial professional. Make sure you understand the risks involved; in particular, municipal bonds are not FDIC insured, like Bank CDs. For those of you with large sums of money in your savings account or under your mattress, give municipal bonds some consideration. Not only do they offer the potential for a higher interest payment than alternative investments, they might also offer a legal way to earn interest without having to pay Uncle Sam a dime. (Please consult a professional for your individual tax situation.)
Ethan Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).