Many people depend on income from conservative investments, such as US Treasuries and CDs, for living expenses. But under the new federal tax law, you may not be able to offset such income with deductions as you have in the past.
My solution: “Munis.” State and local governments and some independent municipal entities issue municipal bonds to finance a variety of municipal projects. High-quality munis (typically with a credit rating of A or higher) provide similar safety, stability and guaranteed income as US Treasuries, which are exempt from only state and local taxes. Advantage: Interest payments for munis are exempt from federal taxes and possibly state and/or local taxes if the bonds are issued in the state and/or city in which you reside.
Currently, the tax-equivalent yields on munis can compare favorably to what high-income investors get on Treasury notes. Taking into account the difference in federal tax treatment, 10-year munis recently paid the equivalent of 2.9% versus 2.45% for a 10-year US Treasury. Even though the effective yields are lower for those in lower tax brackets, middle-income investors still may benefit in high-tax states.
Best ways to invest in munis now…
If you have at least $100,000 to invest: Buy a portfolio of individual munis spread across many municipalities for diversification. Owning individual munis also gives you the most control over the risk that interest rates will rise because you can hold the bonds to maturity. Look for bonds with a credit quality of A or higher and an intermediate maturity (three to seven years) because longer maturities don’t pay much higher yields.
Focus on municipal revenue bonds. They are issued by independent municipal entities such as airports and city water/sewer systems to fund infrastructure improvements or expansions. Your interest is paid from the rock-steady revenues the entities collect. These days, revenue bonds can offer better quality and superior interest payments than comparable general-obligation bonds issued by local or state governments. Examples of attractive revenue bonds: Dallas–Fort Worth Texas International Airport Revenue noncallable bond, maturity date November 1, 2022, credit quality A+, recent federal-tax-free yield 1.53%…Spartanburg, South Carolina Waterworks Revenue, maturity date June 1, 2026, credit quality AA, recent federal-tax-free yield 1.75% to the call in 2023 and 2.5% yield to maturity.
If you have less than $100,000 to invest: Buy an intermediate-term muni bond fund. Your share price will fluctuate, but you get instant diversification. Recommended: iShares National Muni Bond ETF (MUB) holds 3,700 bonds with average maturity of 5.5 years and an average credit quality of AA. The fund’s recent yield of 2% is the tax equivalent of 3.3% in the highest federal tax bracket and 2.7% in the 24% bracket.
