You buy municipal bonds through a broker, directly from your state or local government, or through a mutual fund — and the route you choose depends on how much you want to invest and how hands-on you want to be

Municipal bonds are not sold in a single marketplace the way stocks are. Instead, you work with a broker (a person or firm licensed to buy and sell securities), purchase directly from a government issuer during a new bond offering, or invest through a fund that holds a basket of bonds. Most individual investors use a broker because it gives them access to both new bonds and existing bonds that other investors are selling. Direct purchase from a government is simpler but limited to bonds that government is currently issuing. Mutual funds and exchange-traded funds (ETFs) that hold municipal bonds let you own a piece of many bonds at once, which spreads your risk but means you do not control which specific bonds you own.

Key Takeaways

  • A broker — whether a traditional firm, an online brokerage, or a bank — is the most common way to buy individual municipal bonds, and you can start with as little as $5,000 in many cases.
  • Direct purchase from a government issuer works only for new bond offerings and requires you to contact the issuer or its financial advisor directly, usually with a minimum of $5,000 to $25,000.
  • Municipal bond mutual funds and ETFs let you invest smaller amounts and own pieces of many bonds, but you pay ongoing fees and cannot choose individual bonds.
  • The secondary market — where existing bonds are bought and sold — is where most individual investors end up trading, because new offerings are often limited and sold to large institutional buyers first.
  • You will need a brokerage account (which takes 10 to 20 minutes to open online) and enough cash or margin to cover the purchase price plus any broker markup or commission.

Opening a Brokerage Account

Before you can buy a municipal bond, you need an account with a broker. Most brokers offer online account opening that takes 15 to 20 minutes and requires your Social Security number, address, employment information, and bank details for funding. You will choose between a regular taxable brokerage account and a tax-advantaged account like an IRA if you are buying bonds for retirement — municipal bonds are already tax-free at the federal level for most investors, so the tax advantage of an IRA is less relevant, but some investors still use them.

Large traditional brokerages like Fidelity, Charles Schwab, and E*TRADE all offer municipal bond trading. Online brokerages like Interactive Brokers and Firstrade also carry them. Banks often allow their customers to trade bonds through their brokerage arms. The main difference between brokers is the size of their municipal bond inventory (how many different bonds they have available), their commission structure, and whether they charge a markup on top of the bond price. Some brokers charge a flat fee per trade; others charge a percentage; some charge a markup built into the price you see. Ask about their fee structure before you open an account, because it directly affects your return.

Buying Bonds Through a Broker on the Secondary Market

Once your account is funded, you can search for municipal bonds in your broker's inventory. The secondary market is where most individual investors buy — these are bonds that were issued months or years ago and are now being resold by other investors or institutions. You will see a list of available bonds with their yield (the interest rate you will receive), maturity date (when you get your principal back), credit rating (how safe the bond is), and the price (which may be above or below the original $1,000 face value, depending on interest rates and the issuer's credit quality).

When you find a bond you want, you place an order through your broker's platform just as you would buy a stock. The broker finds a seller, executes the trade, and the bond settles in your account (usually within two business days). You will pay the asking price plus any commission or markup the broker charges. The bond then sits in your account, paying you interest twice a year until maturity, at which point you receive your principal back.

The secondary market has a wider selection than new offerings, but prices fluctuate based on interest rates and the issuer's financial health. If you buy a bond when interest rates are high and rates later fall, your bond becomes more valuable (because it pays a higher rate than new bonds). If rates rise after you buy, your bond becomes less valuable. If you need to sell before maturity, you will have to find a buyer at the current market price, which may be higher or lower than what you paid.

Purchasing New Municipal Bonds Directly From an Issuer

Some investors prefer to buy new bonds directly from the government that issued them, which cuts out the broker and any associated fees. When a city, county, or state issues new bonds, it publishes an official statement describing the bond, the interest rate, the maturity date, and how to purchase. You can find new municipal bond offerings through the Municipal Securities Rulemaking Board's EMMA database (emma.msrb.org), which is free and lists all new and existing municipal bonds.

To buy a new bond directly, you contact the issuer's financial advisor or the underwriting firm handling the sale and express your interest. You will need to provide your name, address, and tax identification number, and you will typically need a minimum investment of $5,000 to $25,000 depending on the issuer. The issuer or underwriter will walk you through the paperwork, and the bond will be registered in your name. You will receive interest payments and your principal back directly from the issuer.

The downside of direct purchase is that new offerings are often limited in quantity and may sell out quickly, especially if they offer an attractive interest rate. Institutional investors and large brokerages often buy the bulk of new offerings before individual investors have a real chance. Additionally, you are locked into the terms of that specific bond — you cannot shop around for a better rate or maturity date the way you can on the secondary market.

Investing Through Municipal Bond Funds

If you want to own municipal bonds but do not want to pick individual bonds or do not have enough money for a single bond (which typically costs $5,000 to $10,000), a municipal bond mutual fund or ETF may be a better fit. These funds pool money from many investors and buy a portfolio of municipal bonds, spreading your investment across dozens or hundreds of bonds and issuers. You can buy into a fund with as little as $1,000 or even less, depending on the fund.

Municipal bond funds come in two main types: actively managed funds, where a fund manager picks the bonds and tries to beat the market, and index funds, which simply track a broad municipal bond index like the Bloomberg Municipal Bond Index. Actively managed funds typically charge higher fees (0.5% to 1% or more per year) but may deliver better returns if the manager is skilled. Index funds usually charge lower fees (0.05% to 0.25% per year) but will match the market rather than beat it.

The trade-off is that you do not control which bonds the fund owns, and you pay ongoing fees whether the fund makes money or loses it. However, funds are more liquid than individual bonds — you can sell your shares any trading day at the current market price. Funds also handle all the paperwork and interest collection for you, which is simpler if you own many bonds.

Understanding Pricing and Costs

Municipal bonds are quoted as a percentage of their face value (usually $1,000). A bond quoted at 102 means it costs $1,020 (102% of $1,000). A bond quoted at 98 costs $980. The difference between the face value and the price you pay affects your actual yield — if you pay more than face value, your yield is lower; if you pay less, your yield is higher.

When you buy through a broker, you will encounter three types of costs. A commission is a flat fee per trade (often $0 to $50 depending on the broker). A markup is a percentage added to the bond price, usually 1% to 2%, which is built into the price you see and not listed separately. Some brokers use a combination of both. On the secondary market, markups are common because the broker is acting as a dealer, buying from one investor and selling to you. On new offerings, underwriters may also add a markup, though this is sometimes disclosed separately.

Always ask your broker what you will pay before you buy. The difference between a 0.5% markup and a 2% markup on a $5,000 bond is $75 — money that comes directly out of your return. Some brokers are transparent about markups; others bury them in the price. Comparing brokers on cost is one of the most important steps in buying municipal bonds profitably.

What Happens After You Buy

Once you own a municipal bond, you will receive interest payments (called coupon payments) twice a year, usually in June and December, though the schedule depends on the bond. The interest is deposited into your brokerage account as cash, which you can reinvest in another bond, hold as cash, or use for other purposes. The interest is generally free from federal income tax and, if the bond was issued by your home state, free from state income tax as well.

You can hold the bond until maturity, at which point you receive your full principal back. Or you can sell it on the secondary market before maturity if you need the money or want to move into a different bond. If you sell before maturity, the price you receive depends on current interest rates and the issuer's credit quality — you may receive more or less than you paid. The difference between what you paid and what you sell for is a capital gain or loss, which has tax consequences.

Keep your bond documents and trade confirmations for your records. Your broker will send you an annual statement showing all interest received and any sales, which you will need for tax purposes. If you own bonds in a taxable account, you will report the interest income on your tax return, even though it is not subject to federal income tax — this is important for calculating your adjusted gross income for other tax purposes.

Frequently Asked Questions

Can I buy a municipal bond with less than $5,000?

Individual bonds typically require a minimum of $5,000 to $10,000. However, municipal bond mutual funds and ETFs let you invest smaller amounts — often $1,000 or less — and own pieces of many bonds. This is the best route if you have limited capital.

What is the difference between buying on the secondary market and buying new bonds?

New bonds are issued directly by the government and sold through underwriters, usually with limited availability and higher minimum investments. The secondary market is where existing bonds trade between investors, offering more selection and the ability to shop for different yields and maturities. Most individual investors buy on the secondary market because it is more accessible.

Do I need a financial advisor to buy municipal bonds?

No. You can buy them yourself through any broker with a brokerage account. However, a financial advisor can help you choose bonds that fit your goals, tax situation, and risk tolerance. If you use an advisor, confirm whether they charge a flat fee, an hourly rate, or a percentage of assets managed — this affects your total cost.

What happens if the city or county that issued my bond runs into financial trouble?

The bond's credit rating reflects the issuer's financial health. Bonds with lower ratings pay higher interest because they carry more risk. If an issuer defaults (fails to pay), you may lose some or all of your principal. This is rare for general obligation bonds backed by tax revenue, but more common for revenue bonds backed by a specific project. Check the credit rating and the issuer's financial statements before you buy.

Can I sell a municipal bond before it matures?

Yes, you can sell on the secondary market through your broker at any time. The price you receive depends on current interest rates and the issuer's credit quality — you may receive more or less than you paid. Selling before maturity also means you give up all future interest payments, so factor that into your decision.