Retirement & Financial Planning Report

Ten-year Treasury bonds yield around 2.7% now. If you are in a 28% federal income tax bracket, you’d net less than 2%, after-tax. In a 33% tax bracket, you’d barely have 1.8%, after-tax.

By contrast, AAA-rated, 10-year municipal bonds have higher yields: around 4.2%. Municipal bond interest is exempt from federal income tax so your after-tax income probably will be much higher than your after-tax income from Treasuries.

As a rule, municipal bonds have lower yields than Treasury bonds. Today, concerns about weak state and local tax revenues have depressed prices of municipal bonds, driving up yields. If you are a buy-and-hold investor and if you buy highly-rated bonds, you can profit from the current high yields on municipal bonds.

Another option is to buy a municipal bond fund. The fund’s prospectus will tell you whether it holds high-quality bonds. According to Morningstar, long-term municipal bond funds now yield 4.3%, on average, while intermediate-term funds have average yields of 3.7%. Because these funds hold municipal bonds, the interest is exempt from federal income tax.