Hello, YieldAlley readers! In this issue:

📈 What If You Miss the Market’s N Best Days? (AQR)

4️⃣ The guy behind retirement’s 4% rule now thinks that’s way too low. (MarketWatch)

💰 Wealthy inheritors plan to fire their parents’ wealth advisors (CNBC)

🌦️ Big Business Is Abandoning Its Climate Goals (Bloomberg)

🤖 These Are the Best Mag Seven Stocks to Consider for AI Investing (Morningstar)

Municipal bonds have long been a staple of tax-conscious investing, but they're not right for everyone. Understanding who benefits most from these tax-advantaged securities requires looking at several key factors beyond just tax brackets.

The most obvious beneficiaries of municipal bonds are investors in higher tax brackets. Since municipal bond interest is exempt from federal income tax (and often state tax for in-state bonds), the after-tax yield becomes increasingly attractive as your marginal tax rate climbs.

For investors in the 32%, 35%, or 37% federal tax brackets, municipal bonds frequently offer superior after-tax returns compared to taxable alternatives. However, this isn't a hard rule since market conditions can create opportunities even for those in lower brackets.

Consider this framework: If a taxable bond yields X% and a municipal bond yields Y%, you need to calculate whether Y% > X% × (1 - your tax rate). But remember, this simple math gets more complex when you factor in state taxes, the 3.8% net investment income tax for high earners, and the specific characteristics of different municipal securities.

Investors in high-tax states like California, New York, or New Jersey face combined federal and state marginal rates that can exceed 50%. For these investors, state-specific municipal bonds that are "double tax-free" (exempt from both federal and state taxes) can be particularly attractive. Even investors in moderate-tax states should run the numbers as the additional state tax exemption might tip the scales.

High-income investors subject to the 3.8% net investment income tax (NIIT) should add this to their effective tax rate when comparing options. Since municipal bond income is exempt from NIIT, this creates an additional 3.8 percentage point advantage that's often overlooked in simple comparisons.

Some investors face "income cliffs" where earning slightly more income could cost them significantly in lost benefits or increased costs. Examples include:

For investors near these thresholds, municipal bonds can help manage adjusted gross income, though it's worth noting that tax-exempt interest still counts for some calculations like modified adjusted gross income (MAGI).

One of the most common mistakes investors make is holding municipal bonds in tax-advantaged accounts like IRAs or 401(k)s. Since these accounts already shelter income from current taxation, the tax-exempt feature of municipal bonds provides no benefit. You're essentially paying for a benefit you can't use.

Municipal bonds belong in taxable accounts, where their tax advantages can actually work for you. This principle of "asset location" can significantly impact your long-term after-tax returns.

Municipal bonds aren't just about taxes. They're also about matching investments to goals. Different investors should consider different types of municipal securities:

Those saving for goals within 1-3 years might consider municipal money market funds, despite their notorious yield volatility. These funds invest primarily in variable-rate demand notes (VRDNs) that reset frequently, causing yields to fluctuate dramatically with supply and demand. Investors willing to monitor yields and potentially switch between taxable and municipal money markets several times per year might capture additional after-tax yield.

For those with 3-10 year horizons, intermediate-term municipal bond funds can offer a balance of yield and stability. These investors should be prepared for moderate price volatility but can benefit from generally higher yields than money market funds.

Investors with horizons beyond 10 years might consider longer-duration municipal bonds or funds. While these carry more interest rate risk, they typically offer higher yields and can serve as a volatility dampener in a diversified portfolio.

This group often finds municipal bonds particularly attractive for several reasons:

Doctors, lawyers, executives, and business owners in peak earning years are classic municipal bond investors. With marginal rates potentially exceeding 40% (federal plus state), the tax savings can be substantial. However, these investors should ensure they're not over-allocating to municipals at the expense of portfolio diversification.

Municipal bonds can play a role in estate planning, particularly for those concerned about state estate taxes. The tax-free income can help heirs manage tax obligations while providing relatively stable value.

Not everyone benefits from municipal bonds:

Those in the 10% or 12% federal brackets rarely benefit from municipal bonds. The tax savings simply don't compensate for the typically lower pre-tax yields.

Investors in their 20s and 30s focused on growth typically shouldn't prioritize municipal bonds. Their long time horizons and need for growth usually make stocks more appropriate for the bulk of their portfolios.

The complexity of comparing after-tax yields, monitoring for opportunities, and managing state-specific considerations might not appeal to investors who prefer simple, set-it-and-forget-it strategies.

While we want to avoid discussing specific yields due to their variability, it's worth noting that the relative attractiveness of municipal bonds versus taxable alternatives fluctuates significantly. Seasonal patterns, Federal Reserve actions, and supply-demand imbalances can create windows where even unexpected investors might benefit from municipal bonds, or where traditional muni investors might be better served elsewhere.

The key is to periodically reassess, especially during known seasonal variations (January and July often see compressed muni yields due to reinvestment demand, while March-April often sees higher yields due to tax-payment-driven selling).

Municipal bonds serve a specific purpose: providing tax-advantaged income to investors who can benefit from that advantage. The ideal municipal bond investor is typically:

For the right investor in the right situation, municipal bonds can be a powerful tool in achieving those objectives. For others, simpler taxable alternatives might make more sense, even if it means writing a slightly larger check to the IRS each April.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

Costco has rolled out a comprehensive package of membership improvements designed to enhance shopping convenience and deliver additional value for both standard and executive members across their warehouse locations.

These improvements demonstrate Costco's strategic response to warehouse club competition, particularly from Sam's Club's successful member perks. The monthly delivery credits effectively reduce the Executive membership breakeven point from the traditional $3,250 annual spending threshold. However, Costco still trails competitors in mobile shopping convenience, notably lacking the curbside pickup service that has become Sam's Club's standout feature.