At what income level do municipal bonds make sense?
If you sit in the 35% income tax bracket and live in a state with relatively high income tax rates, then investing in municipal bonds (munis, for short) will likely be a better option than taxable bonds. Alternatively, if your income is in the 12% tax bracket, then you may want to steer clear of municipal bonds.
Although municipal bonds generally aren't subject to federal taxes, the IRS does include income from such bonds in your modified adjusted gross income (MAGI) when determining how much of your Social Security benefit is taxable.
Should you have municipal bonds in your portfolio? Municipal bonds—which provide interest payments that are generally exempt from federal taxes—offer tax advantages that can be compelling, especially for investors in higher tax brackets. In some cases, their coupons are also exempt from state and/or local taxes.
higher-income individuals will benefit the most from the tax-free nature of municipal bonds. Furthermore, those living in the locality where the bond is issued can enjoy triple-exemptions from federal, state, and local income taxes.
For investors who can benefit from tax-exempt income, a fixed-income-only portfolio should contain a substantial allocation to municipal bonds. We favor 25% or more. In the historical study described below, a 25% allocation to municipals increased annualized tax-equivalent return by 0.5% without increasing volatility.
As of Feb 17, 2024, the average annual pay for a Bonds in the United States is $52,529 a year. Just in case you need a simple salary calculator, that works out to be approximately $25.25 an hour. This is the equivalent of $1,010/week or $4,377/month.
This total is a line item on your annual tax return. Then add in the total of your non-taxable interest – This is usually any municipal bond income. The total of your AGI, plus non-taxable interest, is your MAGI for IRMAA purposes.
Municipal bond yields are relatively attractive after considering the impact of taxes. Source: Bloomberg, as of 12/5/2023. Past performance is no guarantee of future results. The 50.8% tax rate assumes a 37% Federal tax, 3.8% ACA tax, and 10% state tax.
The interest you receive from muni bonds is free from federal taxes but there may be state or local taxes or both. Beware: If you receive Social Security, your bond interest will be counted as income in calculating the taxable amount of your Social Security income. That could increase the amount you owe.
Municipal bonds don't hold up against inflation as well as stocks do. When inflation rises, a muni's fixed payment is less attractive. Still a chance of default. While default risk is very low, municipal bonds could still go into default.
What are some reasons why a person would invest in a municipal bond?
Interest paid on municipal bonds is often tax free, making them an attractive investment option for individuals in high tax brackets. General obligation (GO) munis provide cash flows generated from taxes collected on a project. Revenue munis return cash flows generated from the project itself.
Still, some leading investment managers and analysts suggest it's time for investors to come back home to municipal bonds. "After two tumultuous years, we expect a municipal market recovery in 2024," says Robert DiMella, executive managing director, co-head of MacKay Municipal Managers.
According to asset manager Northern Trust, munis' credit quality is better than ever before. And that makes them a great buy, potentially over Treasury bonds. For investors, adding a dose of munis continues to be the right play.
The tax benefits associated with municipal bonds (such as interest income being exempt from federal taxes) always attract investors to the sector. In 2024, Van Eck expects municipal bonds will offer a solid opportunity for total return correlating with our anticipated decline in yields for the year 2024.
| Name | Yield | 1 Day |
|---|---|---|
| BVMB2Y:IND Muni Bonds 2 Year Yield | 2.83% | 0 |
| BVMB5Y:IND Muni Bonds 5 Year Yield | 2.48% | 0 |
| BVMB10Y:IND Muni Bonds 10 Year Yield | 2.55% | 0 |
| BVMB30Y:IND Muni Bonds 30 Year Yield | 3.71% | 0.00 |
Retirees are often advised to shirt over to safer investments, like bonds. Municipal bonds offer the benefit of interest that's exempt from federal taxes. In some cases, state and local taxes won't apply, either.
The rule of thumb advisors have traditionally urged investors to use, in terms of the percentage of stocks an investor should have in their portfolio; this equation suggests, for example, that a 30-year-old would hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes. Municipal bond income is also usually free from state tax in the state where the bond was issued.
Unlike individual bonds, which usually make semiannual interest payments, bond funds usually make monthly distributions that can be paid directly to the investor or reinvested into the fund to compound returns.
Also referred to as a bond's coupon rate, the nominal yield is the annual income divided by the bond's face value. For example, a bond with a $1,000 face value that pays $50 annually has a nominal yield of 5% (50 ÷ 1,000 = 0.05).
Are I bonds good for high income earners?
Contrast this with I Bonds where all inflation adjustments and accrued interest are tax-deferred until the bond matures 30 years after purchase or is redeemed. This means that I Bonds are an extremely tax-efficient savings vehicle, especially for high income earners as a buyer can defer taxation for up to 30 years.
What is an IRMAA? People with Medicare who earn a high income have to pay an IRMAA, an extra charge on Medicare Parts B and D. The fee kicks in if you make more than $97,000 (going up to $103,000 in 2024) or if you and your spouse collectively earn over $194,000 (going up to $206,000 in 2024).
For 2023, the IRMAA thresholds increased significantly, to $97,000 for a single person and $194,000 for a married couple. For 2024, the IRMAA thresholds again increased significantly, to $103,000 for a single person and $206,000 for a married couple.
You'll pay more for Medicare if you're an individual who earns more than $103,000 or part of a couple who earns more than $206,000. You can sign up for Medicare no matter how much money you make. You can usually pay less for Medicare if you earn less than $30,000.
Fixed-Income Investing Risks
The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise.
