4. Municipal Bond Interest

When cities, counties, or states need to fund public projects like schools, highways, or water treatment facilities, they issue municipal bonds. To entice investors to buy these bonds, the federal government makes the interest payments completely exempt from federal income taxes.

If you purchase a municipal bond from your home state, the interest is often exempt from state and local taxes as well. This creates a stream of completely tax-exempt retirement income.

When evaluating municipal bonds, you must calculate the “tax-equivalent yield” to compare them fairly against taxable bonds. For instance, if you fall into the 24% federal tax bracket, a municipal bond paying 4% interest provides the same after-tax income as a corporate bond paying 5.26%. For high-net-worth retirees in the top tax brackets, municipal bonds offer a highly attractive way to generate reliable yield without inflating their tax bill.