If you’re a municipal bond investor but don’t need the income you receive to support current spending, consider zero-coupon munis instead. With a zero, the income you don’t need today will be reinvested, tax-free, at municipal bond rates.
As the name indicates, zero-coupon munis pay no interest until maturity, when all the accumulated interest is paid. At current yields, you might invest around $6,000 today for a bond that will pay $10,000 in 2012. Because this is a municipal bond, the entire $10,000 would be tax-free.Shop around among several brokers before you buy because yields can vary. Once you buy, plan on holding until maturity. If you sell before maturity, and rates have gone up, you’ll suffer a loss of principal. If rates have gone down you’ll have a profit-and a tax headache to go with it. Hold on until maturity and you’ll get a certain, tax-exempt return.
