• Compare the returns from municipal bonds to other types of bonds. Since the interest income is exempt from federal, and sometimes state and local, income taxes, your marginal tax bracket is a significant factor in deciding whether municipal bonds are appropriate for you. (Any capital gains are subject to taxes. Interest income for some investors may be subject to the alternative minimum tax.) Make sure to determine how a muni bond's yield compares to the after-tax yield on a comparable taxable bond. To do that, calculate the tax-equivalent yield for the municipal bond. If you're not investing in a municipal bond issued within your resident state, which also exempts income from state and sometimes local income taxes, the calculation is fairly straightforward: the taxable equivalent yield equals the tax-exempt interest percentage divided by one minus your marginal tax bracket.

• Don't simply select the bond maturity that offers the highest return. Since interest rate changes can significantly affect your bond's market value, it may make more sense to select a maturity that coincides with when you need the principal.

• Look at a bond's call provisions. Most municipal bonds come with a call provision, which allows the issuer to redeem the bonds prior to their scheduled maturity. Calls are generally only exercised when market interest rates are lower than the interest rate being paid on the bond and are generally not good news for the bondholder. Purchase bonds with call provisions that are most favorable to you.

• Review the bond's credit quality. While municipal bond defaults are rare, they do occur, so review carefully the credit quality of muni bonds. You may want to stick with investment-grade ratings, which means that the issuer is considered financially stable and unlikely to default.

• Hold a diversified portfolio. You should plan to hold at least seven to nine different issues to ensure adequate diversification.

• Consider bonds issued in your resident state. Purchasing muni bonds issued in the state in which you reside means that your interest income will also be exempt from state, and sometimes local, income taxes.

• Review your holdings periodically. Review the credit ratings of all your municipal bonds at least annually. Check the call provisions so you aren't surprised by a call in the coming year. Also, review your holdings to see that they are still consistent with your overall investment objectives and asset allocation plan.