Strategy 2. High-yield Municipal Bonds
High yield municipal bonds come with full tax-exemption benefits, this is especially attractive for investor in high tax brackets or high-tax states such as California.
How much such tax-exemption benefits could be?
Just take a look at some of the high marginal tax rates -
- The top tier marginal Federal tax rate is 39.6%
- The top marginal individual state income tax rates are 13.3% in California and 8.82% in New York.
How high the municipal bonds' yields could be?
Just use Puerto Rico's general obligation bonds as an example, you could achieve above 10% yield tax-free. Yes, we all know Puerto Rick's fiscal situation is terrible, but experts say that's what has been priced in the municipal bonds' prices.
Of course the biggest risk is if the issuer defaults, and the situation will be exacerbated in municipal bonds market because of poor liquidity. To protect yourself, you can purchase a diversified fund, the U.S. News & World Report has a list of best high yield tax free munis.
In our next blog post, we will discuss the third strategy - floating rate notes.