Municipal bonds have long been a safe haven for higher-income investors looking for safety and greater tax efficiency.

The credit squeeze put the municipal bond market through its paces like other competing markets this past year but, it may be time to take a second look at both municipal bonds and muni bond funds.

Let's start with a definition of what a municipal bond is. A municipal bond, or muni, is a bond issued by a local government or their agencies to raise funds for a host of reasons tied to keeping the government going. The potential issuers may include cities, counties, redevelopment agencies, water and sewer projects, school districts, publicly owned airports, seaports and other transportation entities. They pay for everything from immediate government expenses to new roads and various public projects. Municipal bonds come in two flavors-general obligation bonds and revenue bonds. General obligation bonds are intended to raise immediate capital to cover government expenses; revenue bonds are the ones that fund infrastructure projects.

As an incentive for investors to buy these bonds, interest income is often exempt from federal income tax as well as the income tax of the state in which they are issued. Mutual funds that invest in municipal bonds also offer the same tax treatment.

2008 held lots of excitement for muni investors and would be investors. The credit crunch dried up funding sources for public projects and private investments. Many municipalities ended up dropping certain projects because investors weren't there to buy the issues and other sources of financing had dried up as well.

The insurance companies that rate and insure a number of these issues were also scrutinized for their ability to cover their obligations. This lead to an increase in perceived risk because the companies might not have been able to pay the policies if a number of municipalities had defaulted. This occurred even though the financial strength and paying ability of the municipality had not changed.

Who's fled the muni market? Hedge funds, issuers of structured notes and municipal bond mutual funds trying to keep up with increased redemption requests from tapped-out investors. The result was a drastic drop in bond prices. Right now, the best source of demand for munis is individuals. Because they can account for only so much business, it's potentially good news for you.

So where's the opportunity for you? Look at some of the highly rated outstanding bonds. You'll find yields that you certainly won't find in CDs and other investments. Late last year, some municipals were offering long-term, tax-free yields of five percent and above. This translates into the equivalent of nearly seven percent for taxpayers in the 28% tax bracket and nearly eight percent for someone in the 35% tax bracket. That's a very nice return relative to U.S. Treasuries, considered the safest investments of all.

But before you buy, here are some things to know and steps to follow.

Are munis right for you? The first call you make shouldn't be to a broker. It should be to your tax professional and your financial adviser. A CERTIFIED FINANCIAL PLANNER^TM professional can take a look at your entire investment portfolio (there's no point in putting tax-exempt munis into tax-exempt accounts like IRAs or 401(k)s) and determine whether they're the right approach to take for your investments.

What munis are in trouble? There are some governments who issued a hybrid muni known as a variable-rate demand note. These were sold mainly to institutions with maturities of up to 30 years. The rates can reset as frequently as once a day. During early 2008, the rates on these notes shot up to double-digit territory, putting the municipalities that issued them under strain due to very high and volatile interest rates.

Watch those ratings: Yes, the main private investment ratings firms-Moody's and Standard & Poor's among them-have been in the doghouse for rating many battered investments highly, not just munis. But most municipals rated AA or AAA are generally safe to consider. It's also important to check the issuer's long-term ratings history. If they've been consistently highly ranked over decades and the municipality has no financial scandal (something that can be checked through news archives on the Internet), that's another good way to research a bond issuer before making a purchase. Buying an insured bond is ok however, you should buy the bond based on the underlying financial strength not just the insurance rating. Keep in mind that even during the Great Depression, no state defaulted on its general-obligation bonds, and while some munis have defaulted, overall, such defaults are very, very rare.

Keep an eye peeled for the AMT: While most munis pay interest that's free from federal income taxes, some may be subject to the alternative minimum tax, known as the AMT. It's a little more complicated than we have space for here. This is another good reason to talk to your tax professional or financial planner before making a move into munis.

If you are looking to increase your investment yields you may want to investigate municipal bonds. These investments are not for everyone and should only be purchased after you determine that they are suitable for your investment portfolio and situation. Consult with a knowledgeable Financial Planner before investing.