Should You Hold Muni Bonds in an IRA Account?
Other People Are Reading
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Muni Bonds Have Tax Benefits
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The interest income on municipal bonds is normally not subject to federal income tax. Only the capital gain on selling municipal bonds for more than the cost is taxable. Capital gains are not taxed when earned in an individual retirement account, or IRA.
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An IRA Already Has Tax Benefits
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Interest income from any type of investment---not just municipal bonds---is not taxable when earned in an IRA. The investment return on municipal bonds in an IRA will not include a tax advantage. Interest rates on municipal bonds are usually lower than other types of bonds, so the IRA will earn less interest on municipal bonds than other types of bonds.
Bottom Line
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There is no tax benefit to holding municipal bonds in an IRA. The tax advantage of municipal bond interest being non-taxable is irrelevant when the bonds are held in an IRA. There may even be a tax disadvantage from paying a higher future tax on IRA withdrawals than payment of long-term capital gain tax on municipal bonds outside an IRA.
References
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