As tax rates continue to rise, more and more investors are looking towards Tax-Free and Triple-Tax-Free Municipal Bonds (Munis) as the investment vehicle of choice.
The reason why munis look so attractive right now is the fact that the higher the tax rates, the more benefit you derive by investing in tax-free investments.
For example, a Municipal Bond paying 3% tax-free is the equivalent of having a taxable bond pay 4% interest if you are in the 25% tax bracket or 4.62% if you are in the 35% tax bracket. And that just takes into account the federal tax savings. If you are in a high-tax state such as New York or New Jersey and you invest in in-state munis, you can actually end up with yields equivalent to 4.35% if you are in the 25% tax bracket or 5.08% if you are in the 35% tax bracket.
However, before you run out and start moving all of your money into Tax-Free Municipal Bonds, it is important to note that many levels of government, especially local governments, are in serious trouble. Many states and local municipalities are operating with severely unbalanced budgets, which makes these bonds riskier than usual as there is now a serious chance that at least one municipality will default on their bonds within the next 12 months.
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after what the government did to the GM and Chrysler bond holders I doubt it.