Personal Investments with Local Impact
Impact investing is all the rage these days. So what is it? Impact investing is a catch-all phrase used when investments serve a dual purpose to both provide a potential return and serve as an instrument of change to have an “impact” with a cause the investor personally cares about.
A good example of this would be an environmentally-focused mutual fund that invests only in “green energy” companies such as those involved in solar or wind power generation. An often overlooked type of impact investing, however, is the kind that can have a local impact right here in the Lynchburg region. I’m talking about (potentially) tax-free municipal bonds.
As Amherst County Board of Supervisors Chair Claudia Tucker explains, “Municipal bonds have become a prominent way for localities to fund capital projects as federal funding continues to diminish.” These types of bonds have funded many well-known local projects. Donna Witt, Director of Financial Services for the City of Lynchburg, listed Kemper Street Bridge, Main Street Bridge, Fifth Street Improvements, City Stadium Renovation, and Heritage High School all as projects that benefited from funding provided by bond offerings.
So, what is a bond? A bond is very much like a loan. When a company, nonprofit, or government wishes to borrow money publicly, they issue bonds. The buyers of the bonds are “lending” money to that entity. The entity then pays back the bondholders by way of regular interest payments (called coupon payments) and finally a principal payment at the end of the term of the bond, known as the maturity date. From an investor’s standpoint, bonds operate very much like a CD (certificate of deposit) that many are familiar with but with a higher level of risk and a potentially higher level of return. One could buy a $10,000 bond that matures in five years. It will pay interest twice a year for those five years and then will pay the initial principal amount of $10,000 back in full at maturity. There are many different types of bonds. One of the main differences between bonds is their categorization by the type of entity that issued them. It could be a company, in which case it’s called a corporate bond. Interest on these bonds is subject to federal and state taxes. It could also be a government or nonprofit authorized by a government, in which case it’s commonly referred to as a municipal bond, or muni bond.
As their name implies, muni bonds are issued by municipalities. These are most often a city, county, or a state, for example, as well as certain nonprofits authorized by the municipality. (Witt gave the local examples of Centra Health, Randolph College, and the University of Lynchburg). The benefit to the local community of a municipal bond is the ability to fund expensive long-term capital projects. The benefit to the investor (bondholder) is the potential for tax-free interest income. That’s because many municipal bonds pay interest that is federally tax exempt. Bonds that are issued in the bondholder’s state of residence are sometimes also exempt from state income taxes. These types of investments are particularly attractive for investors in the higher tax brackets because as the bondholder’s tax rate increases, so too does the actual return on municipal bonds, known as the taxable-equivalent-yield of that bond. It’s important to note that not all municipal bonds are tax exempt.
Are municipal bonds right for you? This is a personal question. If you’re looking for a potentially tax-advantaged way to earn income and make an impact in the Lynchburg region, then they may be worth a conversation with both your financial advisor and your tax-preparer. All investments, including municipal bonds, carry a certain degree of risk that should be fully understood by the investor.
Disclaimer: This article is generalized in nature and should not be considered personalized financial, legal, or tax advice. All information and ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.