Best Tax-Free Municipal Bonds

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

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 as of October 2025.

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1. Vanguard Tax-Exempt Bond ETF

The Vanguard Tax-Exempt Bond ETF (VTEB -0.01%) is an intermediate-term bond fund 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 3.5% in mid-October 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.

2. iShares National Muni Bond ETF

The iShares National Muni Bond ETF (MUB 0.0%) aims to track an index of investment-grade U.S. municipal bonds. It holds more than 5,500 bonds. Some of its top holdings are bonds issued in California, New York, Massachusetts, and New Jersey.

This bond ETF had a 30-day SEC yield of 3.35% in mid-October 2025, and iShares charges an expense ratio of 0.05%. The yield and annual fee are both highly competitive, as is the risk profile -- this fund invests primarily in AA and AAA bonds.

3. Vanguard High-Yield Tax-Exempt Fund

For bond investors looking for a greater return, the Vanguard High-Yield Tax-Exempt Fund (NASDAQMUTFUND:VWAHX) is hard to beat. Its 30-day SEC yield was an impressive 4.23% in mid-October.

The expense ratio for this bond fund is 0.17%, so it's not the cheapest, but it's reasonably priced. With the focus on generating a higher yield, this Vanguard bond ETF is more volatile compared to the average muni bond fund. However, it invests in more than 3,000 bonds, so it's still well diversified.

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4. iShares California Muni Bond ETF

If you live in California and have a high marginal tax rate, it's a good idea to invest in tax-free municipal bonds issued there so you can avoid state taxes. The iShares California Muni Bond ETF (CMF 0.02%) fits the bill. It invests in investment-grade municipal bonds issued in California, holds more than 1,200 munis, and charges a 0.08% expense ratio.

This California bond ETF had a 30-day SEC yield of 3.07% in mid-October 2025. Because California has some of the highest income tax rates in the U.S., this fund's after-tax yield could be better than what you'd get from other bond funds.

5. Vanguard New York Long-Term Tax-Exempt Fund Investor Shares

New York is another state with high income taxes. If you live there, check out the Vanguard New York Long-Term Tax-Exempt Fund Investor Shares (VNYTX 0.18%). This fund invests in high-quality municipal bonds issued by New York state and local governments.

There are more than 1,500 bonds in this ETF, which charges a 0.14% expense ratio. The 30-day SEC yield was 3.77% in mid-October 2025. The combination of low fees and a solid yield makes this fund the top option for New York residents.

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6. Invesco National AMT-Free Municipal Bond ETF

Some high-income investors need to pay the alternative minimum tax (AMT). The Invesco National AMT-Free Municipal Bond ETF (PZA 0.04%) invests specifically in municipal bonds that are exempt from the AMT.

This fund holds more than 5,000 bonds, and it's notable for investing in long-term bonds with at least 15 years remaining until maturity. Bonds with longer terms generally pay more, which was reflected in this Invesco fund's 30-day SEC yield of 3.9% in mid-October 2025. The expense ratio is 0.28%.

7. iShares Short-Term National Muni Bond ETF

The iShares Short-Term National Muni Bond ETF (SUB -0.06%) provides exposure to short-term munis, meaning those with one month to five years until maturity. An advantage of short-term bonds is that they carry less interest rate risk. If rates rise, the bondholder isn't locked into a lower rate for long.

The expense ratio for this iShares bond ETF is a low 0.07%, and it holds more than 2,500 bonds. The 30-day SEC yield was 2.38% in mid-October 2025. Short-term bonds tend to have lower rates, which is the tradeoff for less interest rate risk.

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Benefits and risks

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 you invest?

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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