How to buy municipal bonds
You buy municipal bonds through a brokerage account, either online or by phone with a broker. You open an account at a firm like Fidelity, Charles Schwab, E*TRADE, or your bank's brokerage arm, then search their bond inventory for munis that match what you want — a specific state, maturity date, credit rating, or yield. Once you find one, you place an order and the bond is held in your account. The process takes minutes to hours depending on whether you trade during market hours.
Most individual investors buy bonds through a secondary market, meaning you are purchasing from another investor rather than directly from the municipality when it first issues the bond. This is simpler than buying at issuance and gives you thousands of existing bonds to choose from at any moment. You can also buy new municipal bonds directly at issuance through your broker, though the selection is smaller and timing matters — new issues are announced and sold within days.
The minimum purchase is typically one bond, which costs between $5,000 and $10,000 depending on the bond. Some brokers offer municipal bond funds or exchange-traded funds (ETFs) that let you invest smaller amounts and own pieces of many bonds at once, which spreads your risk across different issuers and regions.
Key Takeaways
- You need a brokerage account at a firm like Fidelity, Charles Schwab, or your bank to buy municipal bonds; opening one takes 10 to 20 minutes online.
- Individual bonds cost $5,000 to $10,000 each and are bought on the secondary market from other investors through your broker's bond inventory.
- Municipal bond funds and ETFs let you invest smaller amounts and own pieces of many bonds, which reduces the risk that one issuer defaults.
- You pay a markup or commission when you buy, which varies by broker and bond type; ask your broker what the cost is before you trade.
- Tax-exempt municipal bonds save you federal income tax and sometimes state income tax, but the tax benefit only matters if you are in a high enough tax bracket.
Opening a brokerage account
Start by choosing a brokerage firm. Large online brokers like Fidelity, Charles Schwab, TD Ameritrade, and E*TRADE all offer municipal bonds. Your bank may also have a brokerage division. Compare them on whether they charge account fees, what their bond selection looks like, and whether they offer research tools or educational resources about bonds.
Once you pick a firm, go to their website and click the button to open a new account. You will enter your name, address, Social Security number, and employment information. The firm will verify your identity and ask about your investment experience and financial situation — this is required by law, not optional. The whole process takes 10 to 20 minutes. Your account will be ready to fund within a day or two.
Fund your account by linking a bank account or transferring money from another brokerage. Most firms let you do this online when ready or within a few business days. You do not need to fund the full amount you plan to invest — you can add money as you find bonds you want to buy.
Finding and evaluating municipal bonds
Once your account is open, log in and navigate to the bonds section. Search by state (if you want state tax-exempt bonds), maturity date, credit rating, or yield. The broker's platform will show you available bonds with their price, yield, maturity date, and the issuer's name and credit rating.
Read the official statement, which is a document the issuer publishes that explains what the bond finances, the issuer's finances, and the risks. Your broker usually links to this on the bond's detail page. It is dense but contains the real information about whether the issuer can pay you back. If the issuer is a city or county you know, you can also search online for recent news about its finances or credit downgrades.
Check the credit rating, which is a letter grade (AAA, AA, A, BBB, and lower) assigned by agencies like Moody's or S&P. Higher ratings mean lower risk of default but also lower yield. Lower ratings pay more but carry more risk. Most individual investors stick to A-rated bonds or higher unless they are experienced.
Compare the yield to what you could earn in a savings account or Treasury bond. Municipal bonds pay less than taxable bonds because of the tax break, so the math only works if you are in a high enough tax bracket. A financial advisor or tax professional can tell you whether the tax savings are worth it for your situation.
Placing an order and costs
When you find a bond you want, click to place an order. You will see the price (usually expressed as a percentage of the $5,000 or $10,000 face value), the yield, and the maturity date. Review these numbers, then confirm the trade. The order goes to your broker's bond desk, which will execute it within minutes to hours depending on market conditions.
You will pay a markup or commission on top of the bond's price. This is how your broker makes money. The markup is not always shown as a separate line item — it is built into the price you see. Ask your broker what the markup is before you trade, or call their bond desk directly. Markups typically range from 0.5% to 2% of the bond's price, though they vary widely.
Once the trade settles (usually three business days later), the bond appears in your account and you own it. You will receive interest payments twice a year on the dates specified in the bond's terms.
Municipal bond funds and ETFs as an alternative
If you do not have $5,000 to $10,000 to invest in a single bond, or if you want to own many bonds without picking each one yourself, a municipal bond fund or ETF is an option. These are investment funds that hold dozens or hundreds of municipal bonds and let you buy shares for as little as $100 to $1,000.
A municipal bond fund is actively managed by a professional who picks which bonds to buy and sell. You pay an annual fee (called an expense ratio) that typically ranges from 0.3% to 1% of your investment each year. The fund distributes interest income to you monthly or quarterly.
A municipal bond ETF is similar but trades like a stock — you buy and sell shares on an exchange during market hours, and the price moves up and down. ETFs usually have lower expense ratios than funds, often 0.05% to 0.3% per year. Both funds and ETFs spread your money across many issuers, so if one defaults, it hurts less.
The tradeoff is that you give up control over which bonds you own and you pay ongoing fees. But you get when ready diversification and lower minimum investment, which matters if you are starting small.
Tax treatment and who benefits most
Interest from municipal bonds is exempt from federal income tax. If you buy a bond issued in your home state, the interest is usually also exempt from state income tax. This is the main reason people buy them.
The tax break only saves you money if you are in a high enough tax bracket. If you are in the 22% federal tax bracket and earn 3% on a municipal bond, you save 0.66% in federal tax. If you are in the 12% bracket, you save only 0.36%. Someone in the 37% top bracket saves 1.11%. The higher your tax bracket, the more valuable the tax exemption is.
Compare the yield on a municipal bond to the yield on a taxable bond (like a Treasury or corporate bond) after accounting for taxes. If a Treasury pays 4% and you are in the 24% bracket, the after-tax yield is 3.04%. If a municipal bond pays 3.2%, the muni wins. Your broker or a tax professional can help you do this math.
Capital gains tax still applies if you sell a bond for more than you paid. If you hold the bond to maturity, you avoid this issue — you straightforward get your full face value back.
Holding bonds to maturity versus selling early
Most people buy municipal bonds and hold them until the maturity date, when the issuer pays back the full face value. This is the simplest approach and avoids the risk of selling when prices are down.
If you need to sell before maturity, you can list the bond for sale on the secondary market through your broker. The price you get depends on interest rates and the bond's credit quality at that moment. If interest rates have risen since you bought, the bond's price will be lower (because new bonds pay more). If the issuer's credit has worsened, the price will also be lower. You could sell for less than you paid, locking in a loss.
This is one reason municipal bond funds and ETFs appeal to some investors — you can sell your shares anytime without worrying about the bond market's price swings. The fund manager handles the buying and selling of individual bonds.
Common mistakes and what to watch for
Do not assume all municipal bonds are safe. Credit quality varies widely. A bond issued by a wealthy suburb is much safer than one issued by a struggling city. Always check the credit rating and read the official statement before you buy.
Do not ignore the markup. Some brokers charge much higher markups than others, and the same broker may charge different markups on different bonds. Call and ask before you trade, or compare prices across brokers if you are buying a large amount.
Do not buy a municipal bond if you are in a low tax bracket. The tax exemption is only valuable if you pay high federal or state income tax. If you are retired and have little income, or if you are in the 12% bracket, a taxable bond might pay you more after tax.
Do not forget that municipal bonds are not FDIC insured. If the issuer defaults, you could lose money. Diversify across many issuers and credit ratings, or use a fund to do this automatically.
Frequently Asked Questions
What is the minimum amount I need to invest in municipal bonds?
Individual bonds typically cost $5,000 to $10,000 each. Municipal bond funds and ETFs let you invest smaller amounts, often $100 to $1,000 per share. If you have less than $5,000, a fund or ETF is your best option.
Do I pay taxes on municipal bond interest?
No, municipal bond interest is exempt from federal income tax. If you buy a bond issued in your home state, the interest is usually also exempt from state income tax. However, capital gains tax applies if you sell the bond for a profit before maturity.
Can I lose money on a municipal bond?
Yes, in two ways. If the issuer defaults, you lose the principal. If you sell before maturity and interest rates have risen, the bond's price will be lower than what you paid. Holding to maturity eliminates the second risk but not the first.
How do I know if a municipal bond is safe?
Check the credit rating (AAA is safest, lower letters are riskier) and read the official statement, which explains the issuer's finances and the risks. You can also search online for recent news about the issuer's budget or credit changes. Diversifying across many issuers and ratings reduces risk.
Should I buy individual bonds or a municipal bond fund?
Individual bonds work if you have $5,000 or more to invest, want to hold to maturity, and can research issuers. Funds and ETFs work if you have less to invest, want when ready diversification, or prefer not to pick bonds yourself. Funds charge ongoing fees; individual bonds do not, but you pay a markup when you buy.