- Introduction
- Reverse Mortgage
- Sale and Leaseback of Your Home
- Nonqualified Deferred Compensation Plans
- Income Deferral Programs
- Other Investments for Retirement
- Comparing Taxable and Tax-Exempt Yields
- Capital Gains Tax Rates
- Tax Rate on Dividends
- Comparing Tax-Advantaged Investing to Other Investing
- Investing in Growth Stocks or Growth Mutual Funds
When evaluating investments, you should compare the after-tax yield you are earning. How do you know when a tax-exempt yield is better than a taxable yield? You must look at a taxable investment on an after-tax basis in order to compare it with a tax-exempt obligation. Below is a chart that provides the after-tax yields on taxable securities. To use the chart, find the yield you expect to earn on a taxable investment. Then find your marginal tax rate. Where the row and column meet is the after-tax yield. For example, if your investment's taxable yield is 9% and you are in the 35% tax bracket, your after-tax yield is 5.85%.
Compare your tax-exempt yield with this number. You'll also need to factor in any state and local taxes when making your investment decisions.
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If your marginal tax rate is... |
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10% |
15% |
25% |
28% |
33% |
35% |
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If taxable yield is... |
Then after-tax yield is... |
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|
5% |
4.50% |
4.25% |
3.75% |
3.60% |
3.35% |
3.25% |
|
|
6% |
5.40% |
5.10% |
4.50% |
4.32% |
4.02% |
3.90% |
|
|
7% |
6.30% |
5.95% |
5.25% |
5.04% |
4.69% |
4.55% |
|
|
8% |
7.20% |
6.80% |
6.00% |
5.76% |
5.36% |
5.20% |
|
|
9% |
8.10% |
7.65% |
6.75% |
6.48% |
6.03% |
5.85% |
|
|
10% |
9.00% |
8.50% |
7.50% |
7.20% |
6.70% |
6.50% |
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If you decide to use tax-exempt municipal investments as a tax saving strategy, keep the following points in mind:
- You generally have to be in the 25% marginal tax bracket or higher for municipals to be beneficial.
- You should not invest in tax-exempt municipals within a tax-deferred retirement plan. The money in your retirement account is already tax advantaged and your goal should be a high pre-tax yield.
Occasionally, municipal funds declare a capital gain that will be taxed.
In addition, when planning an income tax strategy, consider the alternative minimum tax (AMT). For example, some municipal investments, such as private activity bonds, are subject to the AMT. Consult your professional tax professional to help you develop an income tax planning strategy.
