You can buy municipal bonds through most major online brokerages, either as individual bonds or through funds and ETFs. Individual muni bonds typically start at $5,000 per bond, while muni bond funds let you get started for much less. The process differs depending on whether you buy newly issued bonds, trade existing ones on the secondary market, or invest through a fund.
Three Ways to Invest in Muni Bonds
There are three paths into the municipal bond market, and each suits a different type of investor.
Individual bonds (new issues): When a state or local government issues new bonds, you can buy them during the initial offering through your brokerage. Many issuers set aside a “retail order period” that gives individual investors priority before institutional buyers get access. These windows typically last anywhere from one hour to a few days. Your broker will notify you of upcoming offerings, or you can search for them using the brokerage’s fixed-income tools.
Individual bonds (secondary market): After bonds have been issued, they trade on the secondary market, much like stocks. You search your brokerage’s bond inventory, find one that matches your desired maturity, yield, and credit quality, and place an order. Prices may be at or above par value (the bond’s face value), and your broker builds a markup into the purchase price or a markdown when you sell. This trading cost is baked into the price you see rather than charged as a separate commission, so compare prices across brokerages when possible.
Muni bond funds and ETFs: If you want broad diversification without selecting individual bonds, municipal bond funds and ETFs hold portfolios of hundreds or thousands of bonds. You can buy shares for the price of a single share, often under $50, making this the lowest barrier to entry. Funds also solve the liquidity problem: selling an individual muni bond before maturity can mean accepting a lower price, while fund shares trade throughout the day on an exchange.
How the Tax Benefits Work
The main appeal of municipal bonds is their tax-exempt status. Interest earned on muni bonds is free from federal income tax. If you buy a bond issued in your home state, the interest is typically exempt from state and local taxes as well. That double exemption can make a muni bond with a lower stated yield more valuable after taxes than a higher-yielding corporate bond or Treasury, especially if you’re in a higher tax bracket.
One wrinkle to know: certain muni bonds are subject to the Alternative Minimum Tax, or AMT, a parallel tax calculation that applies to some high-income earners. If the AMT applies to you, look specifically for bonds or funds labeled “AMT-free.” Several ETFs focus exclusively on AMT-free municipal bonds for this reason.
What to Check Before You Buy
Municipal bonds are generally considered safe, but they are not risk-free. The SEC recommends reading the bond’s official statement, which is the disclosure document that lays out the terms of the offering, who’s issuing it, and how the debt will be repaid. You can find official statements and ongoing issuer disclosures on EMMA (Electronic Municipal Market Access), a free site run by the Municipal Securities Rulemaking Board at emma.msrb.org.
General Obligation vs. Revenue Bonds
General obligation bonds are backed by the full taxing power of the issuing government. If a city issues a GO bond, it can raise taxes to make payments. Revenue bonds, by contrast, are backed only by income from a specific project or source, like a toll road, hospital, or water system. Revenue bonds can carry more risk because repayment depends on that single revenue stream. Before buying a revenue bond, understand exactly what income is pledged to pay bondholders and whether a feasibility study supports the projected revenue.
Credit Ratings and Financial Health
Credit rating agencies assign letter grades to muni bonds, with AAA being the highest quality. These ratings give you a quick sense of default risk, but the SEC cautions against relying on them alone. Dig into the issuer’s financial condition by looking at its total debt load, pension obligations, the health of the local economy (employment, income levels, tax base), and audited financial statements showing both revenues and expenses. Also consider whether there are statutory limits on the issuer’s ability to raise revenue, such as requirements for voter approval before increasing taxes.
Building a Portfolio of Individual Bonds
If you go the individual bond route, diversification requires real capital. A single bond might cost $5,000, but assembling a portfolio spread across different issuers, maturities, and bond types could require $50,000 or more. Many investors use a “bond ladder” strategy, buying bonds that mature at staggered intervals (say, every one to two years over a 10-year period). As each bond matures, you reinvest the proceeds into a new longer-term bond, which smooths out interest rate risk and gives you periodic access to your money.
For investors who don’t have the capital or time to research dozens of individual bonds, combining a core muni bond fund with a handful of individual bonds from your home state can offer both diversification and the state tax exemption on the individual holdings.
Where to Place Your Order
Most major online brokerages offer municipal bond trading. When you log in, look for a “fixed income” or “bonds” section. You’ll be able to filter by state, maturity date, credit rating, yield, and whether the bond is a new issue or secondary market offering. For new issues, your brokerage may list upcoming retail order periods you can participate in. For secondary market bonds, you’ll see current asking prices with the markup already included.
Compare the yield and price of the same bond across brokerages if you have multiple accounts. Markups vary, and even a small difference in price affects your effective yield over the life of the bond. There is no centralized exchange for muni bonds the way there is for stocks, so pricing can be less transparent. EMMA’s price transparency tools let you see recent trade prices for a specific bond, which helps you judge whether the price your broker is offering is reasonable.
Costs to Expect
For individual bonds, the primary cost is the dealer markup or markdown embedded in the price. This spread can range from a fraction of a percent on highly liquid, large-issue bonds to 1% or more on thinly traded smaller issues. You won’t see it as a line item on your trade confirmation, but you can compare your purchase price against recent trades on EMMA to estimate it.
For muni bond funds and ETFs, you’ll pay an annual expense ratio, which is a percentage of your investment deducted automatically. Low-cost muni ETFs charge expense ratios in the range of 0.05% to 0.25% per year. Actively managed muni funds tend to charge more, sometimes 0.5% or higher. Over time, these fees reduce your effective return, so factor them into your comparison between individual bonds and funds.