TCP Investment Planning · Updated November 2026
4% Municipal Bond or 5% Taxable Bond: Which One Actually Pays More?
Compare after-tax economics rather than stated yields alone.
Municipal bond
Qualifying municipal bond interest can receive federal income-tax exclusion under applicable rules, while state taxation can differ.
Taxable bond
Interest from a taxable bond is generally subject to federal income tax.
Tax-equivalent yield
The calculation converts a tax-free yield into the taxable yield needed to produce the same after-tax return.
Risk still matters
Credit risk, duration, liquidity, call risk, and state-tax treatment still matter even when after-tax yields match.
The takeaway
A lower stated municipal yield can beat a higher taxable yield for investors in sufficiently high applicable tax brackets, but risk still matters.
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FAQ
Can a lower municipal yield beat a higher taxable yield?
Yes.
Does marginal tax rate affect tax-equivalent yield?
Yes.
Is municipal interest always exempt from every tax?
No.