How to Earn 5% Tax Free on Your Money

New York Tax Free Municipal Bond

We are in the midst of tax season right now, and many investors are looking at the interest and dividends showing up on their tax returns. It would be great if you could convert that taxable income into non-taxable income. The best way to get tax free interest is from municipal bonds.

You have a couple options: one is to owns the bonds directly and the other is by purchasing municipal bond closed end funds, often referred to as tax-free CEFs or tax-free stocks. These CEFs own municipal bonds that pay interest which is exempt from Federal income taxes and may be exempt from state income taxes if issued in the state you live in or issued by one of the US territories, such as Puerto Rico, the Virgin Islands, or Guam. Municipal bonds are usually issued by states, counties, cities, and other governmental entities such as school districts, sewer districts, bridges, and water and power departments. WallStreetNewsNetwork.com has list of over 100 tax-free income CEFs, and more than 85 with yields more than than 5%.

The advantages of these CEFs are numerous. Almost all of them pay dividends on a monthly basis, whereas, if you by an individual bond, the interest is paid semi-annually. CEFs have no minimum investment, whereas municipal bonds are sold in $5,000 denominations and many brokers have minimum purchase requirements of $15,000 to $25,000. You also have better liquidity with CEFs as prices are quoted real time and quotes are immediately available on the Internet, unlike individual bonds. In addition, CEFs provide diversification by owning many bonds in the portfolio. One other advantage is that you can often buy many of these CEFs at a discount from net asset value.

The Nuveen Insured Municipal Opportunity Fund (NIO) pays a generous yield of 6.0% and is selling at a 7.9% discount. The Net Asset Value, also known as the NAV, is the intrinsic value of the shares if the entire fund were liquidated and all the funds distributed among the shareholders. The leverage ratio is 36.84%, about average of the ratios of all the leveraged muni CEFs. The management fee is 0.63%.

The Dreyfus Strategic Municipal Bond Fund (DSM), founded in 1989, also yields 6.0%, and is selling for a 4.3% discount to Net Asset Value. The fund does utilize some leveraging, currently 31.27%, which is a bit lower than many other tax free CEFs. The advisor fee is 0.50%.

For New Yorker, there is the Eaton Vance Insured New York Municipal Bond Fund (ENX) yielding 5.4%, and was founded in 2001. It trades at a 7.2% discount to NAV. Leverage is 38.16%.

California residents may consider the Invesco Van Kampen California Value Municipal Income Fund (VCV), with a payout rate of 5.9%. It has a discount to NAV of 4.2%, with leverage of 35.57%. The company was founded in 1992.

Here are some issues to watch out for before investing in tax free CEFs:
* a highly leveraged portfolio
* high management/advisor fees
* trading at a premium to net asset value
* bonds which are subject to the Alternative Minimum Tax
* low quality bonds in the portfolio

But there is one other significant risk: an increase in interest rates, which will cause the bonds to drop in price and therefore causing the CEFs to fall also. Over the last several years, rates have remained low. Interest rates will rise eventually, but when rates rise is the big unknown.

A list of tax free income closed end funds, which includes yields, discounts and premiums, leverage, management fees, date founded, and other information, is available at WallStreetNewsNetwork.com.

Disclosure: Author did not own any of the above at the time the article was written.

By Stockerblog.com