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If you live in a state with high taxes NY, NJ or CA (and a few others) there will be municipal bond funds and ETFs for your state. In order for tax free to make sence you must live in a high tax state and be in the highest tax bracket.

Note that if income tax laws change the value of your bonds will also change.

If you have enough money it might make sense to call a bond dealer (possibly ameritrade has a 'bond desk') and buy the municipal bonds outside of a fund.

I am told that unlike stocks you can get better prices by calling various brokers. I have never owned any bond that was not exchange traded so I have no first hand experience.
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