Series 7: 6.1.7.4. Types Of Bond Funds

Taken from our Series 7 Online Guide

6.1.7.4. Types of Bond Funds

Some bond funds are more beneficial from a tax perspective than others. Tax-advantaged funds are suitable for investors with high tax rates. Note that even when interest is tax-exempt at the federal or state level, all capital gains distributions are subject to taxation at all levels (federal, state, and local).

Here is a breakdown of how the interest is taxed on different kinds of bond funds.

Tax Burden of Bond Funds
	Taxable at this level?
Type of Fund	Federal	State	Local
Corporate bond funds	Yes	Yes	Yes
Agency-backed MBS and CMO funds	Yes	Yes	Yes
Treasury funds	Yes	No	No
Municipal bond funds	No	Maybe*	Maybe*
* Maybe = Municipal bond funds may be taxable at the state and local levels, especially if the bonds were issued outside the investor’s state; income from some municipal bond funds also may be subject to the alternative minimum tax (AMT).

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