All About Bonds – Taxation, Savings, and Estate Planning

As we enter the middle of May here in Montana, we are approaching the illustrious long, warm, sunny days of summer and seeing less and less of the volatile spring/late winter weather that usually lingers until Memorial Day.  

Seeing the onset of warmer temperatures gets me excited for backpacking season – one of my favorite summer activities. As I think through my gear list for this season, I’m excited to add a new pair of Oboz hiking boots to the list. While I’ve been an avid Keen wearer ever since I can remember, I recently found that my narrow feet fit better in Oboz boots than the wide Keen footbeds.   

I’m sure you’re wondering why you’re reading about my hiking boots when you clicked on a financial blog post about bonds. As it relates to the world of investing, I like to think bonds are like the hiking boots of a good investment portfolio. If you don’t have a good foundation that’s suited for the conditions and the environment, it’s extremely difficult to make meaningful progress towards your goals.  

In this post, let’s take a deep dive into the world of bonds and how they are an extremely valuable, useful and necessary foundational tool in the world of investing.  


Let’s begin with some of the fundamentals. First, the term “Bonds” is frequently used interchangeably both as a proper and common noun, both in broad and specific cases. Think about the difference between Buffalo and Bison. While most people think of the same animal, Bison is the proper term while Buffalo is the more broad, generic term. The same applies to bonds. “Bonds” is a general, broad term but is frequently used to describe more specific instruments such as Corporate Bonds, US Treasuries, Municipal Bonds, US Savings Bonds, and even CDs.  

As mentioned above, bonds come in a variety of shapes and forms. Bonds can be privately held or publicly traded, bought directly from the issuer or on the secondary market, and can be held in electronic or paper form. They can also have set or varied interest rates, varying risk levels, and different underlying purposes.  

Bonds are generally all structured very similarly, which allows an investor to have a general level of familiarity with them and how they operate. Most bonds are set up for an investor to lend a lump sum of money to an institution, government, or corporation in exchange for a stated rate of interest and their original investment repaid at maturity. Unlike stocks which provide a fractional equity ownership stake in the underlying company, bonds are a debt instrument that makes the owner of the bond a de facto lender to the issuer.  

For sake of not exhausting every single scenario, let’s touch on some of the most common examples of investing in bonds. For most investors, the three most common bonds for investment purposes are Corporate, Municipal, and Treasury. While corporate bonds are issued by companies to facilitate capital for growth or operations, municipal bonds are issued by state and local governments for public projects such as toll roads or water treatment plant upgrades. Treasuries are instruments issued by the US Treasury and are backed by the full faith and credit of the US Government.  

Another fundamental aspect of bonds is the relationship between bond prices and interest rates. While interest rates affect stock prices in a more complex way, bond prices and interest rates are very straightforward. Bonds and interest rates move opposite to each other in an inverse correlation, meaning when one goes up, the other goes down, and vice versa. Therefore, interest rates are one of the main drivers of decision making when investing in bonds.


One of the biggest differences between bond types is taxation. Not all bonds are created, nor taxed equally. When it comes to the difference between corporate, municipal, and treasury bonds, all are taxed differently. While the interest on corporate bonds is taxed at both the federal and state levels, most treasuries are exempt from state and local income tax. Most municipal bonds are exempt from federal income tax, and potentially state and local income tax if you live in the state of issuance. This creates various opportunities for tax savings and achieving the best after-tax return. When looking at the best way to compare the different rates of return, the most commonly used formula used to compare these all together is called the Tax-Equivalent Yield(TEY).  

Another potential form of taxation with bonds is capital gains tax. While most people own bonds for the income and stability they provide, bonds can still appreciate in value and be sold for a profit. When this occurs, the amount of the capital gain is recognized and added to the seller’s taxable income and assessed a capital gains tax. Just like any type of capital gain, it is taxed as a short-term capital gain if held under a year and a long-term capital gain if held for over a year.  

When evaluating the potential income tax savings provided through investing in treasuries or municipal bonds, it is important to remember that tax-free income can still be added back into certain types of government program eligibility calculations. For instance, if you are over 65 and enrolled in Medicare, your Medicare premiums are calculated based on your Modified Adjusted Gross Income(MAGI) from 2 years earlier. If high enough, this can trigger additional surcharges known as Income-Related Monthly Adjustment Amount(IRMAA). The calculation for MAGI factors in tax-free income from municipal bonds. If a taxpayer is pushed into the 3rd or 4th IRMAA tier, this can equate to several hundred dollars in additional Medicare premiums. This can be important especially for higher-rate taxpayers filing single or head of household returns with smaller tax brackets than those who filed Married Filing Joint or Married Filing Separate Tax Returns.


While bonds should not be relied on as an investment with high growth potential, they make an excellent vehicle for savings and keeping up with inflation. Even though we are seeing bonds and other fixed income investments paying over 5% right now, this rate environment won’t last forever. So, it is important to frame our expectations in a longer-term context as opposed to the current temporary environment. Historically, an estimated 2-4% return is a more reasonable expectation as it relates to long-term planning and future growth forecasting. 

 Unlike stocks, bonds carry a high level of stability and reliability with low to moderate price appreciation. This makes for a great savings vehicle as inflation risk is one of the greatest threats to a conservative investor. Bonds also allow you to easily define a timeframe that you would like the money to be available for, which decreases the uncertainty of it being there for you when you need it. Contrast this with stocks, which carry a high level of volatility and the risk of price decline when the funds need to be withdrawn.  

Another savings benefit to bonds is the fact that, because they carry a set timeframe, it is psychologically more difficult to liquidate them before maturity. We as humans tend to naturally desire to see something through to completion. The same thing holds true for investing in something with a set maturity. While we know that we can liquidate bonds prior to maturity, we tend to lean towards holding it to the date we see on our statement or confirmation. Sometimes, these small mental restrictions can mean the difference between an investor withdrawing the funds for a short-term desire or continuing to hold the assets in an interest-bearing investment towards their future goals.

Estate Planning  

Bonds carry many interesting characteristics that make them flexible for estate planning purposes. First, because they carry set maturities, they can be used to provide for certain known expenses occurring in the future. For example, when an investor passes away, it can take many months or years to settle his or her estate. During this waiting period, investing any idle cash into short-term bonds, CDs, or other short-term vehicles can be a great way to earn extra interest on the funds while waiting for the estate to settle. This can create more wealth for the end beneficiaries by allowing the assets in the estate to go farther.  

Perhaps the most unique characteristic of certain bonds and CDs is the survivor benefit, also known as a death put. This benefit allows the beneficiary of a bond or CD to sell, or “put” the bond or CD back to the original issuer at its par value or face amount if the original owner passes away. 

The survivor benefit of a bond or CD carries two main benefits for the beneficiary. First, it allows the beneficiary to virtually eliminate market and interest rate risk completely; both of which can affect the price of a bond when redeeming or selling. This allows the beneficiary to have confidence that the money will be available when they need it to settle the affairs of the estate.  

The second benefit of the survivor option is that it allows the bond holder to lock in a long-term maturity. While it sounds counterintuitive, locking in a long maturity for an elderly investor typically coincides with a high interest rate. Without the survivor option, the beneficiary might be stuck with a long-term bond or CD when the owner passes away. This could potentially result in selling at a loss to pay for the estate’s expenses. However, if there is the survivor option, this allows the beneficiary to sell the bond or CD back to the issuer even if there are many months or years remaining to maturity. This allows both the account owner to achieve a higher rate of return while they are still living and the beneficiary to have peace of mind of the liquidity that will be available when the owner passes away.  

Spiritual Application

At this point, we’ve covered many topics and strategies as it relates to bonds and their various uses and features. Regardless of where you’re at in your investing journey, you may have heard some negative opinions of bonds and their usefulness within a portfolio. While it is easy to gravitate towards the highest performing investments as opposed to the more “boring” ones, there is a lot of spiritual instruction regarding conservative investments.  

We see in Ephesians 5:15(NKJV) this instruction: “See then that you walk circumspectly, not as fools but as wise, redeeming the time, because the days are evil.” Notice that it doesn’t say, “always be doubling your money or else you fail”. While investments that while growth investments are extremely important and have their place in a good portfolio, owning some conservative investments shows the exercise of wisdom. We know that two of the wealthiest men in the Bible, David and Solomon, practiced extreme wisdom in what they did.  

 Not only does wisdom bring about good decision making, but it also brings about wealth! One of my favorite verses about money in the Bible, Ecclesiastes 11:2(NLT), says, “But divide your investments among many places, for you do not know what risks might lie ahead.” Diversification is another Biblical principle that was founded long before any money manager or institution came up with it. And if the Bible is clear when it talks about diversifying, we should be listening!  

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This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk.