Tax-free municipal bonds are fixed-income investments that fund public projects, such as schools, highways, and parks. State and local governments issue municipal bonds, or "munis" for short. Since these bonds are government debt, they're a low-risk (but not risk-free) investment.
As the name suggests, they also save you money on taxes. There are no federal taxes on interest earned from tax-free municipal bonds. There are also typically no state or local taxes if you buy a municipal bond issued in your home state.
The easiest way to invest is through municipal bond funds since selecting municipal bonds yourself can be time-consuming. A municipal bond fund allows you to get exposure to hundreds to thousands of munis for a diversified bond portfolio.
Best tax-free municipal bonds in 2025
Here are the seven best tax-free municipal bonds, along with the number of holdings, expense ratio, and 30-day SEC yield for each bond fund.
1. Vanguard Tax-Exempt Bond ETF
NYSEMKT: VTEB
Key Data Points
The Vanguard Tax-Exempt Bond ETF (VTEB +0.24%) is an intermediate-term bond exchange-traded fund (ETF) that invests in more than 9,500 bonds. Like just about all Vanguard tax-free municipal bond funds, the expense ratio is extremely low -- the cheapest on this list at 0.03%. The 30-day SEC yield was 3.47% as of Oct. 30, 2025.
For a municipal bond fund, this Vanguard ETF has a fairly high yield. It costs hardly anything in fees, and the large number of bonds keeps risk to a minimum.
General Obligation Bonds
2. iShares National Muni Bond ETF
3. Vanguard High-Yield Tax-Exempt Fund
Revenue Bonds
6. Invesco National AMT-Free Municipal Bond ETF
Related investing topics
Why are municipal bonds tax-free?
In 1895, the Supreme Court ruled that the federal government had no power to tax interest on municipal bonds issued by state and local governments. The 16th Amendment to the U.S. Constitution, which authorized federal income taxes, included this exemption for municipal bonds.
One of the reasons the exemption has stuck around is that it allows states and governments to borrow money at a lower cost. This makes it more economically viable for them to invest in public projects.
Benefits and risks of investing in tax-free municipal bonds
Here are the biggest benefits of investing in tax-free municipal bonds:
- You save on taxes. If you're in a high tax bracket, tax-free munis could be just what your portfolio needs. You'll avoid adding to your federal taxes, and possibly your state and local taxes, too.
- They're safe. There's very little risk of losing money with municipal bonds. Their default rate from 1970 to 2022 was less than 0.1%, according to Moody's Investor Service.
- They provide a predictable income. Tax-free municipal bonds generally pay interest twice a year.
Like any investment, tax-free municipal bonds also have their downsides:
- They have low returns. Municipal bonds tend to pay less than other bonds, and over long periods of time, their average returns are well below the average stock market return. Make sure the tax savings outweigh the low interest rate.
- They have interest rate risk. If interest rates go up, the value of older municipal bonds at lower rates will decline.
- They're not always easy to sell. This can be an issue with smaller municipal bonds, but it probably won't be a problem if you stick to tax-free municipal bond funds.
Should I invest in tax-free municipal bonds?
Consider investing in tax-free municipal bonds if you're looking for fixed-income investments and you want to lower your tax liability. Bonds, in general, are safer than stocks and a good way to reduce volatility in your investment portfolio. They're particularly well suited for older investors who are retired or getting close to retirement.
Whether you should invest in tax-free municipal bonds depends on your current tax situation. This type of bond typically doesn't pay as much as other bonds, although there are some high-yield options. The tax benefits are what make the difference.
Your marginal tax rate can help you figure out the right type of bond investment to buy by calculating the after-tax yield on bond funds. If a bond fund has a 5% yield, but you'll pay 35% in taxes on the interest, then you'll net 3.25%. In that case, tax-free municipal bond funds paying 3.5% to 4% would offer a greater after-tax yield, making them the more profitable investment option.
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