Many of my clients have an overweight position of tax-free municipal bonds in their portfolios. If you are one of them, consider the benefits of diversifying into other asset classes that can generate higher after-tax income for you and provide the diversification your portfolio is currently lacking.
Tax-free income or taxable income: Which gets your more cash that you can spend?
Let’s assume that a $100,000 municipal bond has a 3% coupon rate. Let’s also assume that marginal federal income tax rate for taxable income is 37% (highest in 2018) and state and local taxes are not applicable. For this municipal bond, the after tax income would be:
|Face amount of municipal bond||$100,000|
Now let’s tax a look at a $100,000 taxable investment that has a 6% coupon rate. Assuming a tax-rate of 37% on the income, the after-tax income would be:
|Face amount of taxable investment||$100,000|
|Income tax paid||-$2,220|
While no one likes to pay taxes, the municipal bond owner is doing themselves a disservice as the after-tax (spendable) income invested in the taxable investment is 26% more income than the municipal bond.
The right question to ask
So, the right question to ask is: What taxable investments can generate an after-tax yield that is higher than what I can receive with a tax-free investment?
There are many potential taxable investment options that are available, but the right ones for you will depend on your unique financial situation.
Please call me at (610) 999-3599 or click here to learn more about how you can generate more after-tax income.