My rule of thumb is that 25% is the break-even rate: munis and taxable bonds of comparable risk should have the same yield at a 25% tax rate.
Thus, if you are in the 32% federal bracket, you should almost always prefer munis even if there is no low-cost bond fund for your state; with 8% state tax, you would pay 8% on out-of-state munis but 35.8% on Treasuries.
In the 24% federal bracket, if Net Investment Income Tax raises your marginal rate to 27.8%, then I would prefer Treasuries if you pay state income tax.
As a separate issue, how sensitive are you to inflation? Even if munis are slightly more tax-efficient than Treasuries, you might want to use TIPS if you are sensitive to inflation risk.
Thus, if you are in the 32% federal bracket, you should almost always prefer munis even if there is no low-cost bond fund for your state; with 8% state tax, you would pay 8% on out-of-state munis but 35.8% on Treasuries.
In the 24% federal bracket, if Net Investment Income Tax raises your marginal rate to 27.8%, then I would prefer Treasuries if you pay state income tax.
As a separate issue, how sensitive are you to inflation? Even if munis are slightly more tax-efficient than Treasuries, you might want to use TIPS if you are sensitive to inflation risk.
Statistics: Posted by grabiner — Fri Apr 26, 2024 10:21 pm