“When adjusted for a tax rate of 26% or higher, municipal bonds outperformed taxable bonds 65% of the time.”
Fidelity Investments research, comparing annual tax-equivalent versus taxable municipal bond returns, for the twenty-year period 1992-2011.
The Takeaway: Municipal bonds usually pay less income than a comparable taxable bond. But once taxes are taken into account, the tax-exempt municipal bond often leaves the investor with more after-tax income, making it a better investment. Fidelity’s research suggests that once your overall tax bracket reaches 26%, municipal bonds become very attractive investments.