Why Tax-Exempt Investments Are No Longer So Exciting
March 04, 2009
It used to be that there was a difference between investments with taxable dividends and those which were not taxable. If your tax bracket was high enough, tax-exempt investments made real financial sense.
For instance, back in the 1950s and 1960s the federal income tax rate was as high as 91 percent for earnings over $400,000. In that situation a municipal bond paying 1 percent was a better deal for the upper crust than a taxable bond paying 5 percent. Or 9 percent.
Today the top federal rate is 35 percent for everything over $357,700. These numbers tell us that tax burdens have come down enormously during the past few decades, that we probably could balance the federal budget if we went back to the tax levels of the Eisenhower and Kennedy years, and that tax-exempt bonds are no longer so attractive because the federal tax rate is far lower than it was in the past.
No less important, if you have a federally-insured IRA, certificate of deposit or a federally-insured money market deposit accounts (and not just money market programs) you may have more security at a time when a number of states, counties and communities have both massive deficits and declining revenues. In a way, we live in an era when paying taxes may actually be better than trying to find tax-exempt revenues.
For updated tax rates see the 2010 federal income tax brackets.