city hall

In addition to the Roth IRA I opened on E-Trade, I also opened an individual brokerage account. You can do a lot of different things with an individual brokerage account, but the main reason I opened one is to purchase municipal bonds. Right now municipal bonds are not providing much income since interest rates are so low, however as rates rise again they could become a better alternative to just putting money away in a savings account, and I want to be ready to buy them once the time is right.

For those that aren’t familiar with them, a bond is a debt security issued by an organization to raise money. This organization could be a publicly traded company or a government entity, and a municipal bond is debt security issued by a county, municipality, or state. One of the biggest advantages of municipal bonds is that they are not taxable on the federal level and they are free of state income taxes if the bonds are issued in that particular state. So for example, if you live in New York you can buy bonds from a municipality in New York and avoid paying income taxes. And if you happen to live in a state that charges no state income tax, you can buy municipal bonds from any state and avoid paying income taxes. One thing I will point out is when I say you pay no state income taxes, I am referring to taxes on the yield (or coupon payments) from the bonds. Bonds can also be purchased at a discount, so for example if you pay $98 for a bond that is worth $100 that gain would most likely still be subject to the capital gains tax. Fortunately you can easily avoid this scenario by avoiding any bonds that are trading for less than their face value.

Bonds aren’t currently yielding much since interest rates are so low, but they could be a viable alternative to stocks once interest rates rise again. If and when that happens municipal bonds may be worth looking into if you have already maxed out your Roth IRA but still want to avoid paying taxes. Before you consider buying a bond, you should always do your own research and make sure you are completely aware of the tax ramifications for your individual situation.

Buying bonds on E-Trade is also a lot easier than it looks, and I will probably post another article on this topic at some point in the future. I might also use my individual brokerage account for other things and may post more on that as well. For now that covers my last bucket, and at this point I think I have a good plan to reach my goal of having at least a million dollars to retire with by the time I am in my 60s.