Municipal bonds, or “munis,” are debt securities issued by state and local governments to finance various public projects, such as infrastructure improvements, schools, and hospitals. One of the primary advantages of investing in municipal bonds is their tax-exempt status. The interest income earned from munis is typically exempt from federal income taxes, and in some cases, it may also be exempt from state and local income taxes, depending on the investor’s location and the issuer of the bond.

This tax exemption makes municipal bonds particularly appealing to investors in higher tax brackets, as it can significantly increase their after-tax returns compared to taxable bonds with similar yields. The equivalent taxable yield can be calculated to determine the rate a taxable bond would need to offer to match the after-tax return of a municipal bond. For example, an investor in a high tax bracket might find that a municipal bond yielding 4% provides a better after-tax return than a taxable bond yielding 6%.

Municipal bonds are generally considered to be relatively safe investments, as they are backed by the taxing power of the issuing government entity. However, it’s important to note that they are not entirely risk-free. The creditworthiness of the issuer, prevailing interest rates, and overall market conditions can all impact the value and return of municipal bonds. Investors should carefully consider their individual financial circumstances and consult with a financial advisor before investing in municipal bonds.