The State of Georgia and its municipalities issue tax-free municipal bonds. By issuing municipal bonds, the State as well as local governments borrows money to build bridges, roads, hospitals, schools, sewer systems, stadiums, airports, power plants, prisons, and provide for other needs of local governments. Municipal bonds are generally issued to raise money for major capital projects.

Almost all states and local governments such as counties, cities, towns, issue municipal bonds from time to time. The State of Georgia receives the highest rating from Moody’s (AAA) and Standard & Poors (AAA). Just like any borrower, the State of Georgia, Fulton County, City of Roswell as well as universities and local governments pay interest on municipal bonds to the investors that own them (or bondholders), usually once every 6 months. A major benefit to holders is that the interest earned from municipal bonds is tax-free in terms of federal income taxes. The added benefit is the fact that interest from most municipal bonds issued by entities in the State of Georgia can also be free of state income taxes, local income taxes, and the alternative minimum tax (AMT). A 5% state of Georgia tax-free municipal bond would provide an 8.18% taxable equivalent yield for an individual in the 35% federal tax bracket.

Municipal bonds are considered safe investments from a historical perspective. According to Moody’s less than 1% of municipal bonds have defaulted since World War II. The reason for this is the fact that the bonds issued by local governments are backed fully by the taxation power of that government. A corporation may cease to exist and not pay its debt but a local government very rarely ceases to exist altogether and dissolve. This means that as long as the local government exists, the local government should be able to generate tax revenue to pay back the bonds. The combination of tax-free income and safety of principal make municipal bonds attractive to many investors. Investors should consult with their financial advisor on which bonds or investment options are best suited for their time horizons, risk tolerances and overall investment objectives.

This article was written by Tom Tarabicos, Senior Financial Advisor with Covenant Wealth Group in Roswell at 678-884-8010 or after hours at 678-464-6409