Series 6: 5.1.7.4. Types Of Bond Funds

Taken from our Series 6 Online Guide

5.1.7.4. 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).

The following table offers a breakdown of how interest is taxed for different 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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