Municipal Bonds — Tax-Free Income

Overview

Municipal bonds are issued by state and local governments and offer interest income that's typically exempt from federal taxes — and sometimes state taxes too. Their tax-equivalent yield often beats comparable corporate bonds for investors in higher brackets, making munis a cornerstone of tax-advantaged retirement planning. Learn how to calculate after-tax returns with our compound interest calculator, and compare muni funds alongside other options in the ETFs vs index funds guide.

Key Takeaways

• General obligation (GO) bonds are backed by the taxing power of the issuer.
• Revenue bonds are backed by specific project income (tolls, utilities, hospitals).
• Tax-equivalent yield = muni yield / (1 − marginal tax rate) — this is the true comparison to taxable bonds.
• Munis are most beneficial for high-income investors in the 32%+ tax bracket.

Practical Tips

• Use MUB (national muni ETF) or state-specific muni funds for triple-tax-free income.
• Calculate your tax-equivalent yield before comparing munis to corporate bonds.
• Munis rarely default — the historical default rate for investment-grade munis is near zero.