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A Little Muni Madness

Posted by: Adrienne Carter on February 20, 2006

Well it’s President’s Day, and thanks to our forefathers taxes are an inevitability. (I’ll avoid the cliche, but you know what I’m thinking.)


In any case, taxes are a big deal when it comes to investing. Along with expenses, they take a big bite out of your returns. But most of us don’t consider the after-tax returns of a mutual fund or other investment. But it’s just as important a factor as fees, management and strategy.

That’s why municipal bonds look so appealing. These fixed income investments issues by states and other local governments are a great way to get tax-free income without incurring a whole bunch of risk.

And according to a study by the folks at Franklin Templeton, the after-tax returns on municipal bonds are second only to stocks over the past twenty years. Between 1985 and 2005, the S&P 500 put up annualized gains of 9.71% taking into account the tax impact; muni bonds 8.14%; treasuries 6.68%; and corporate bonds 6.49%. All this assumes an investor in the top tax bracket.

Of course, your muni choice--say between a national muni fund or a state-specific muni fund--depends on your situation. Investors in a high-tax state like New York or California may be better off in a state-specific fund. While those in Texas and Florida may find a national muni fund a better option.

Do the math. Morningstar has a really useful calculator to help you determine your best options.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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