Municipal bonds (or "Munis") are loans you make to local and state governments. When you buy a muni bond, you are helping to fund public projects like building new schools, repairing highways, or improving city parks.

The "Triple Tax-Free" Perk

The biggest reason people choose municipal bonds is the tax benefits.

• Federal Tax: The interest you earn is almost always exempt from federal income tax.

• State and Local Tax: If you buy a bond issued by the state or city where you live, you often don't have to pay state or local taxes on that interest either.

• The Impact: This "triple tax-free" status means you get to keep more of the money you earn compared to other types of bonds.

The Two Main Types of Munis

Review these with your parent or guardian to understand where the money for your interest comes from:

• General Obligation (GO) Bonds: These are backed by the "full faith and credit" of the government that issues them. The city or state promises to use its power to tax citizens to make sure you get paid back. These are generally considered very safe.

• Revenue Bonds: These are paid back using the money generated by a specific project. For example, if a bond is used to build a toll bridge, the money from the tolls is what pays you your interest. These can be a little riskier because if people stop using the bridge, the project makes less money.

Essential Facts for You and Your Parents

To be fully informed, you and your parents should understand these four points for 2026:

1. Credit Ratings

Since cities and states are not as big as the federal government, you need to check their "credit score." Agencies like Moody’s or Standard & Poor’s give bonds grades (like AAA, AA, or B). A higher grade means the bond is considered safer, while a lower grade usually means the bond will pay you a higher interest rate because it is riskier.

2. The "Alternative Minimum Tax" (AMT)

While most muni interest is tax-free, some specific bonds (called "Private Activity Bonds") might still be subject to a special tax called the AMT. This is something your parents should check with a tax professional if you plan on buying large amounts of these bonds.

3. Call Risk

Many municipal bonds are "callable." This means the city or state has the right to pay you back your money early and stop paying you interest if rates go down (similar to a homeowner refinancing a mortgage). If your bond is called, you get your original money back, but you have to find a new place to invest it.

4. Primary vs. Secondary Markets

• Primary Market: You buy the bond the moment it is first issued by the city.

• Secondary Market: You buy the bond from another investor who already owns it. Most teen-friendly brokerage apps allow you to browse and buy bonds on the secondary market.

Planning Your Portfolio

Since municipal bonds are generally lower-risk, they can act as a "stabilizer" for your account.

• Check the Maturity: Munis can last anywhere from one year to 30 years. Make sure the date the bond "matures" matches up with when you think you will need the money (like for college or a first apartment).

• Diversify Locally: You don't have to buy only one city's bonds. You can buy a "Municipal Bond ETF" which is a basket of hundreds of different city and state bonds, making your investment even safer.