re: Tax Free Muni Bonds

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Unless you are hitting the top marginal tax rate, you shouldn't own them.

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Why do you say this? The after tax benefits of owning tax exempt munis increases with marginal tax rates. At some point as gross income increases the benefits of owning tax exempt munis will make them superior investments to taxable investments within a particular investors risk tolerance.

A single taxpayer claiming the standard deduction for 2015 with $500,000 of income from taxable corporate bonds will have an income tax liability of $151,874. That would leave him with $348,126 of after tax income compared to the muni investor with $500,000 of after tax income (ignoring the net investment income tax used to fund Medicare). The taxable portfolio would have to earn just about $762,000 to result in the same $500,000 of after tax income. Do you think it is easy to achieve a return on investment 52.4% higher than munis without greater risk?

At $100,000 of income the tax savings is $18,225. It would take an additional $39,600 of taxable income to yield the same amount of after tax income. You would still need a 39.6% higher rate of return to break even with the muni portfolio.

At $20,000 the tax savings is down to $998, but it would take an additional $1,523 of income to break even. You would still need to earn a 7.6% higher rate of return from taxable investments.

The above comparisons do not take into account capital gains or qualified dividends taxed at lower rates than interest income, which reduce the advantages of tax exempt bonds. But my point is that your one size fits all investment advice is wrong. Individual investors need to make decisions taking into consideration their risk tolerance and cash flow requirements. As income levels rise, the benefits of investing in munis become more obvious, but each investors needs to decide for himself where the risk-reward breakeven point is.