Municipal bonds are issued by states, cities, counties and school districts to underwrite projects such as hospitals, schools and roads. They generate income free from federal tax, which means you don't have to share earnings with Uncle Sam. Your tax bracket is a major factor in determining whether municipal bonds are appropriate for you. As a rule, the higher your tax bracket, the more municipal bonds make sense. Mutual funds are managed by full-time investment professionals, so you never have to worry about which bonds to buy and sell.
Unit trusts are fixed portfolios with a set maturity date.
To answer this question, identify the interest rate you must earn from a taxable bond to equal the yield on a municipal bond with the same maturity date and credit rating. To do this, divide the tax-free yield by 100, minus your tax bracket. For example, assume you are considering a municipal bond with a 5.30 percent yield and you're in the 31 percent tax bracket. If you cannot find an attractive taxable bond that generates a yield of 7.68 percent or better, a municipal bond may be right for you. Contribute to a Roth IRA if you are eligible.