Q. I know municipal bonds are tax-free. Is there an income level where that’s more important? I’ve heard if you don’t make much, it won’t matter and maybe taxable bonds are better.
— Wondering

A. Municipal bonds are debt obligations issued by local governments or government agencies.

Funds raised are generally used to develop or improve public works projects.

And yes, muni bonds are often free from federal tax, and depending on who issues the bond and where the buyer lives, the bonds may be also be free of state tax.

Municipal bonds can be a very good source of income for anyone in a high tax bracket, said Vicky Tomaro, an Investment Advisor Representative with Tomaro Financial Group in Wall.

“If you are in less than a 25 percent tax bracket, you may want to find other tax-managed investments or consider tax-deferred investments for future income,” Tomaro said.

And even if you are in a higher tax bracket, but if you don’t need current income, you may still want to consider other tax managed or deferred positions, Tomaro said.

That’s because muni bonds will often pay a lower rate than taxable bonds. It’s a trade-off between a higher rate and lower tax obligations, and whether that works for you will depend on the particulars of your finances.

“We should always be conscious of any taxes that we may have to pay and how the investments will work now and in the future,” she said.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.

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