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I am interested in two municipal ETFs for my IRA retirement account: NXJ (New Jersey Municipal Bond Fund) and NRK (New York Municipal Bond Fund).

I live in New Jersey and NXJ currently has a distribution yield of 5%. If I buy NXJ, will I get a tax exemption on the distributions received from the fund? Would it be on the state and federal capital gains

How about NRK, a New York municipal fund. Would I still receive a tax exemption?

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No, you will not. IRA distributions are taxed at ordinary income rates, and there's no sense in investing in tax-free investments inside the IRA. You can get corporate bonds with higher yields and the same level of risk.

If you're talking about the distributions received by the IRA, not taking money out of the IRA, then you will not pay tax on any of them - that's the whole point of the IRA. Regardless of the fund. IRA investment income is only taxed when you actually withdraw money from the account, at ordinary rates.

  • Thank you for the response. How about if I buy NRK (NY Muni fund) in a brokerage account. Will I be taxed as if it was just another ETF, If I live in NJ? thank you again for your help. – jessica Feb 25 '14 at 18:59
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    @jessica you should check the NJ law, but generally states exempt only bonds from their own municipalities. I wouldn't expect a NY fund to be exempt in NJ. – littleadv Feb 25 '14 at 19:41
  • For actual bonds, states exempt their own and Federal. For a mutual fund all states I know set a slightly lower standard: NJ in particular requires the fund be 80% invested in NJ and/or Federal, see page 20 of the NJ-1040 instructions at state.nj.us/treasury/taxation/prntgit.shtml . An NY fund wouldn't do even this much. – dave_thompson_085 Aug 26 '15 at 5:39

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