Which type of investments typically produce tax-exempt income?

Municipal bonds are investments issued by state or local governments that often offer tax-exempt income. This means that the interest income generated from these bonds is typically not subject to federal income tax and may also be exempt from state and local taxes, depending on the investor's residency. This tax advantage makes municipal bonds particularly attractive for investors in higher tax brackets who are seeking to minimize their tax liabilities while earning income.

In contrast, corporate bonds usually generate taxable interest income, as they are debt securities issued by corporations. Stocks may provide capital gains and dividends, but these earnings are generally taxable as well. Therefore, municipal bonds stand out as the primary investment type that typically produces tax-exempt income, aligning with the core principles of tax planning and investment strategy.