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| Because interest income generated by taxable bonds is normally taxed as ordinary income, investors in the higher tax brackets may benefit from gaining exposure to municipal bonds, either through fund or individual bond investments. Unlike their taxable counterparts, interest income generated by municipal bonds is generally expected to be exempt from federal income taxes and state and/or local income taxes if the investor is resident in the state where the bonds were issued. |
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| Frequently, because of their tax-free status, tax-exempt fixed income investments offer lower yields. However, depending on your tax bracket, they may actually generate more interest income on an after-tax basis than higher yielding taxable investments. |
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| When examining taxable and tax-exempt securities, compare similar credit quality and maturities to ensure a fair and accurate comparison. Note that interest income generated by some municipal bonds and bond funds may be subject to the federal alternative minimum tax (AMT). |
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Tax-Exempt |
Taxable |
| Yield |
4.0% |
5.5% |
| Annual Interest |
$4,000 |
$5,500 |
| Federal Income Taxes Paid |
$0 |
$1,540 (28% marginal Federal ordinary income tax rate)
$1,815 (33% marginal Federal ordinary income tax rate) |
| Net Interest Income |
$4,000 |
$3,960 (28% marginal Federal ordinary income tax rate)
$3,685 (33% marginal Federal ordinary income tax rate) |
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| To take advantage of the tax benefits of municipal securities, consider purchasing them in a taxable account if you are in a higher tax bracket (generally, 25% or higher). You may want to speak to your tax advisor for more information. |
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