What is 'Triple-Tax-Free'

Triple-tax-free is a way of describing an investment, usually a municipal bond, which features interest payments exempt from taxes at the municipal, state and federal levels. Triple-tax-free municipal bonds offer tax-exempt interest payments to investors for several reasons. However, the primary reason is the U.S. Constitution forbids the federal government from taxing interest earned on loans to municipalities and states. 

Triple-tax-free investments are also sometimes called "triple tax-exempt" investments.

BREAKING DOWN 'Triple-Tax-Free'

A triple-tax-free municipal bond is a debt security issued by a state, municipality or county. Typically, municipal bonds are issued to generate capital for large infrastructure projects such as schools, bridges, hospitals or highways. Through offering tax incentives, localities encourage residents to invest in infrastructure improvements that benefit the community. Triple-tax-free municipal bonds may be general obligation bonds or revenue bonds.

Triple-tax-free municipal bonds function in the same way as other bond investments. The bond’s principal is paid back at the time the bond matures. In the interim, the bondholder receives interest payments. Triple-tax-free municipal bonds are typically considered a low-risk investment, as they are backed by the government that issues them.

Most, but not all, states have made interest income received from securities issued by the state or a state government entity exempt from state income tax. Finally, the remaining state or municipality offers tax-free status to the issuer at its particular level of government as a courtesy. These tax incentives encourage residents to invest in capital improvements in their local communities.

Limitations of Triple-Tax-Free

While there are definite tax benefits to owning triple-tax-free investments, tax-free status on earnings does come at a price. Because they are low-risk investments, tax-free municipal bonds usually offer lower returns than corporate bonds or other taxed investments. The low-interest rates of triple-tax-free municipal bonds may expose bondholders to inflation risk. Inflation risk happens if the rate of inflation outpaces the interest earned on the investment vehicle. The bondholder may ultimately end up with an investment that earns a negative rate of return.

Depending on an individual's tax obligation, this downside risk may not be recovered. Higher income earners gain more from tax-free investments than lower income earners. Triple-tax-free investments are also particularly appealing to investors who live in areas with high state or municipal tax rates, such as New York.

RELATED TERMS
  1. Taxable Municipal Bond

    A taxable municipal bond is a fixed-income security issued by ...
  2. Municipal Note

    A municipal note is debt issued by state and local governments ...
  3. Tax-Exempt Sector

    The tax-exempt sector is a market niche comprised of investment ...
  4. Public Purpose Bond

    A public purpose bond is used by municipalities to finance public ...
  5. Municipal Convertible

    A municipal convertible is a type of municipal bond that begins ...
  6. Special Assessment Bond

    A special assessment bond is a type of municipal bond used to ...
Related Articles
  1. Investing

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  2. Investing

    Consider These Municipal Bond ETFs

    Though relatively low-risk, there are still some factors to consider when taking the plunge into municipal bond ETFs.
  3. Investing

    Think Twice Before Buying Tax-Free Municipal Bonds

    Municipal bonds are relatively safe, tax-exempt securities--but they are not without drawbacks. Due diligence is required.
  4. Financial Advisor

    How to Find the Best Bets in Muni Bonds

    Approach investing in municipal bonds the same as you would investing in stocks.
  5. Investing

    The Top 5 Municipal Bond Funds for 2016

    Understand how the addition of municipal bond mutual funds can enhance a portfolio, and learn the top-rated municipal bond funds to consider for 2016.
  6. Investing

    What's a Tax-Efficient Investment for a Large Sum?

    Here's how to invest a large sum, such as assets from a profit-sharing plan, with a mind toward tax efficiency.
  7. Investing

    The Top 5 Municipal Bond ETFs for 2016

    Learn about exchange-traded funds that invest in municipal bonds issued by local U.S. municipalities with returns on bonds exempted from federal tax.
  8. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  9. Investing

    Taxation Rules for Bond Investors

    To sum-up there are three types of bonds: government bonds, municipal bonds, and corporate bonds. Find out how each of these bonds are taxed and what you can do as an investor.
  10. Investing

    Muni Bond ETFs to Date 2016 Performance Review (MUB, XMPT)

    Learn how municipal bond exchange-traded funds have performed year-to-date in 2016, and which ones have performed the best and the worst so far.
RELATED FAQS
  1. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a ... Read Answer >>
  2. How are municipal bonds taxed?

    Discover information about the various tax implications for municipal bonds and zero-coupon municipal bonds at the state ... Read Answer >>
  3. Where can I buy government bonds?

    The type of bond dictates its purchase. Federal bonds are issued by the federal government, while municipal bonds are issued ... Read Answer >>
  4. How can I find tax-exempt mutual funds?

    Learn about finding tax-free mutual funds at major investment firms, including how tax-free funds work and what you should ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center