Tax-smart investment management1

The average Portfolio Advisory Services client has saved $3,900 in taxes per year,2 thanks to just one of our many tax-smart investing techniques (based on average account balance of $715,367)

Invest in municipal bond funds or ETFs

Depending on your tax bracket and financial situation, the investment team may look to municipal bond funds and ETFs when it comes to the bond portion of your asset allocation, drawing on the extensive analysis of our in-house research team.


These investments may help you keep more of what you earn because the municipal bonds typically generate income free from federal taxes and, in some cases, state taxes.


While municipal bond yields are often lower than similarly rated taxable bonds, when you adjust for federal tax rates, their after-tax yields may actually be higher.


A closer look at after-tax yields shows that income from municipal bonds may be more attractive


Bar chart shows a hypothetical example comparing annual income from a $100,000 investment in a taxable account in a 10 Year AAA municipal bond yielding 2.56% versus a 10 Year AAA taxable US Treasury Bond yielding 3.80%. Taxable bonds with higher income look great at first glance, but once you adjust for federal tax rates, income from municipal bonds may be more attractive. Chart shows the municipal bond's pre- and post-tax income is $2,560. This is lower than the taxable bond's pre-tax income of $3,803. But after taxes, the taxable bond provides income of $2,890 for the 24% tax bracket, $2,586 for the 32% tax bracket, $2,327 for the 38.8% tax bracket, and $2,251 for the 40.8% tax bracket. Once your federal tax bracket has been factored in, municipal bond yields may be more attractive, with municipal bonds producing greater income than taxable bonds for certain tax rates.


FOR ILLUSTRATIVE PURPOSES ONLY. This hypothetical example shows annual income from a $100,000 investment in a taxable account and the impact to that income from the four highest Federal tax rates. The municipal bond investment has a 2.72% assumed yield and the taxable US Treasury yield is assumed to be 2.97% yield (Thomson Reuters and Fidelity Investments, respectively, as of 06/30/2023). This hypothetical example is used for illustrative purposes only; actual investment results may vary. It does not reflect the impact of state taxes, federal and/or state alternative minimum taxes, tax credits, exemptions, fees, or expenses. If it did, after-tax income might be lower. Please consult a tax advisor for further details. All or a portion of the income may be subject to the federal alternative minimum tax. Income attributable to capital gains are usually subject to both state and federal income taxes. Rate includes a Medicare surtax of 3.8% imposed by the Patient Protection and Affordable Care Act of 2010.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal funds. Although municipal funds seek to provide interest dividends exempt from federal income taxes and some of these funds may seek to generate income that is also exempt from the federal alternative minimum tax, outcomes cannot be guaranteed, and the funds may generate some income subject to these taxes. Income from these funds is usually subject to state and local income taxes.

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