You buy municipal bonds through a brokerage account, not directly from the municipality
Municipal bonds are sold through brokers — either full-service firms like Fidelity or Vanguard, or discount brokers online. You cannot walk into a city hall and buy them directly. You open a brokerage account (which takes 10 to 15 minutes online), fund it with cash, and then search for and purchase bonds the same way you would buy a stock.
The bond market is less transparent than the stock market. Prices and availability change constantly, and different brokers may show you different bonds at different prices for the same issuer. This is normal — the municipal bond market is decentralized, and each broker sources bonds from different dealers.
Most individual investors buy municipal bonds through one of three routes: a full-service broker (who gives advice but charges higher fees), a discount online broker (lower fees, you choose the bonds yourself), or a mutual fund or exchange-traded fund that holds municipal bonds (you own a share of a diversified portfolio instead of individual bonds).
Key Takeaways
- You need a brokerage account to buy municipal bonds; you cannot purchase them directly from a city or county government.
- Full-service brokers charge higher fees but offer guidance; discount brokers charge less and let you pick bonds yourself.
- Municipal bond funds and ETFs let you own a diversified mix of bonds without choosing individual ones.
- Bonds are sold in $5,000 increments, and you should understand the maturity date and tax status before you buy.
- The secondary market (where existing bonds trade) has wider spreads and less price transparency than stock markets.
Opening a brokerage account and funding it
Start by choosing a broker. Common options for individual investors include Fidelity, Charles Schwab, E*TRADE, TD Ameritrade, and Vanguard. Each has a website where you can open an account online in minutes. You will need your Social Security number, a government ID, and proof of address (a recent utility bill or bank statement works).
Once your account is open, you transfer money into it from your bank account. This usually takes one to three business days. Some brokers offer a money market fund or sweep account that holds your cash until you are ready to buy bonds; others let it sit as cash. Either way, your money is there and ready to spend on bonds.
You do not need a large amount to start. Most brokers allow you to buy a single bond for $5,000 (the standard minimum), though some allow smaller purchases. If you want to own multiple bonds from different issuers, you will need at least $5,000 per bond.
Searching for and selecting individual bonds
Once your account is funded, log in to your broker's website and look for the bond trading section. You will see a search tool where you can filter by state, maturity date, credit rating, yield, and whether the bond is tax-exempt. If you live in a state with high income tax and want to avoid state tax on the interest, search for bonds issued in your state — the interest is usually exempt from both federal and state income tax.
The bond listing will show you the issuer (the city or agency), the coupon rate (the interest rate you will receive), the maturity date (when you get your principal back), the current price, and the yield to maturity (the actual return you will earn if you hold it until it matures). Pay attention to the maturity date — a 30-year bond is very different from a 5-year bond in terms of risk and interest rate sensitivity.
Before you buy, check the credit rating. Bonds are rated by agencies like Moody's, Standard & Poor's, and Fitch. Investment-grade bonds are rated BBB or higher; anything below that is considered high-yield or "junk" and carries more risk of default. Most individual investors stick to investment-grade bonds unless they are comfortable with higher risk.
Once you have found a bond you want, click to purchase it. You will see the exact price, the total cost (price plus any broker fees), and the settlement date (usually two business days later). Review the details, confirm the purchase, and the bond is yours.
Understanding the costs and fees involved
When you buy a municipal bond, you pay the asking price plus a markup or commission. With discount brokers, this is often built into the price you see — there is no separate "fee" line, but the dealer has already added their profit. With full-service brokers, you may see an explicit commission. Either way, you are paying something.
The markup on municipal bonds is typically 1 to 2 percent of the purchase price, though it can be higher or lower depending on the bond and the broker. This is higher than stock commissions, which is one reason why buying individual bonds is more expensive than buying a bond fund. If you are buying a $5,000 bond with a 1.5 percent markup, you are paying $75 extra.
Some brokers offer "no-commission" municipal bond trading, but this usually means the markup is hidden in the price rather than charged separately. Always compare the all-in cost across brokers before you buy.
Using municipal bond funds or ETFs instead
If you do not want to pick individual bonds, you can buy a mutual fund or exchange-traded fund that holds a portfolio of municipal bonds. These funds own dozens or hundreds of bonds, so you get instant diversification. You buy and sell fund shares the same way you buy stocks — through your brokerage account, in any dollar amount, with minimal fees.
The trade-off is that you do not know exactly which bonds you own, and you do not get the predictable income stream that comes with holding a bond to maturity. Fund prices fluctuate daily based on interest rates and the credit quality of the bonds inside. But for many homeowners, especially those with smaller amounts to invest, a fund is simpler and cheaper than buying individual bonds.
Common municipal bond funds include Vanguard Tax-Exempt Bond Fund, iShares National Muni Bond ETF, and Schwab U.S. Aggregate Bond ETF. Each has different holdings, expense ratios (annual fees), and tax efficiency. Compare the expense ratio and the fund's holdings before you buy.
What happens after you buy: holding and selling
Once you own a municipal bond, you receive interest payments (usually twice a year) directly into your brokerage account. The interest is typically exempt from federal income tax, and if the bond was issued in your state, it is usually exempt from state income tax as well. This is the main reason homeowners buy municipal bonds — the after-tax return is often higher than taxable bonds.
You can hold the bond until it matures, at which point you get your principal back. Or you can sell it before maturity on the secondary market. If you sell early, the price you receive depends on current interest rates and the bond's credit quality. If interest rates have risen since you bought the bond, you will likely get less than you paid. If rates have fallen, you may get more.
Selling a bond before maturity involves the same markup costs as buying — the dealer will add a spread to the price. This is another reason why municipal bonds work better as long-term holdings: the costs of trading in and out are significant.
Tax considerations and reporting
The interest you earn on municipal bonds is exempt from federal income tax. If the bond was issued in your state, the interest is also exempt from state income tax. However, if you sell a bond for more than you paid, you owe capital gains tax on the profit. If you sell for less, you can deduct the loss.
You do not have to do anything special to claim the tax exemption — your broker reports the interest to the IRS as tax-exempt interest, and you report it on your tax return (even though you do not owe tax on it). Your broker will send you a 1099-INT form each year showing the interest you received.
Keep records of what you paid for each bond and when you bought it. If you sell before maturity, you will need this information to calculate your gain or loss for tax purposes.
Frequently Asked Questions
Do I need a lot of money to start buying municipal bonds?
No. Most brokers allow you to buy a single bond for $5,000, which is the standard minimum. If you want to own multiple bonds from different issuers, you will need $5,000 per bond. If you have less than $5,000 to invest, a municipal bond fund or ETF is a better option.
What is the difference between a general obligation bond and a revenue bond?
A general obligation bond is backed by the full taxing power of the municipality — the city or county promises to raise taxes if needed to pay you back. A revenue bond is backed only by the income from a specific project, like a toll road or water system. General obligation bonds are typically safer because they have a broader source of repayment.
Can I lose money on a municipal bond?
Yes, in two ways. If you sell before maturity and interest rates have risen, the bond's price will have fallen and you will receive less than you paid. If the issuer defaults (fails to pay interest or principal), you lose money. Investment-grade bonds default rarely, but it does happen.
Should I buy individual bonds or a bond fund?
Individual bonds are better if you have at least $25,000 to invest and want predictable income until maturity. Bond funds are better if you have less money, want diversification, or do not want to manage individual bonds. Funds are also simpler for most people because you do not have to research individual issuers or worry about selling before maturity.
How do I know if a municipal bond is safe?
Check the credit rating from Moody's, Standard & Poor's, or Fitch. Investment-grade bonds (BBB or higher) are considered safe by most standards. You can also research the issuer's finances — your broker's website usually has links to financial statements and official statements for each bond. If you are unsure, stick to highly rated bonds from large, well-known municipalities.