Another Case for Tax-Exempt Bonds

I moved tax-exempt bonds into some of our Retirement Watch portfolios recently, after the May-June meltdown. That’s a controversial move, because most people invest using a rearview mirror. Instead, they should notice that after the decline many tax-exempts are bargains and provide a margin of safety. You need to buy carefully, or buy a quality mutual fund or closed-end fund (my preference). Here’s someone else’s thoughts on this and other investments.

Consider that New Jersey Turnpike 4.73% tax-free yield. We sat in a meeting with one of our New Jersey clients and reviewed his portfolio. The client is a successful businessman. He was joined in the meeting by his financial professional. We dissected his New Jersey tax bracket. He is somewhere in the 51%-52% marginal tax bracket. He is a New Jersey resident paying federal income taxes and New Jersey taxes at the top rates. He bumps up against levels which limit his deductions and expenses when he completes his tax return. And we must add the Obamacare tax he pays. That is how his marginal tax rates reach 52%.

Sitting in that meeting, we took apart 4.73% as a yield that he can obtain by investing in a long-term debt instrument with a senior claim on the revenues of the New Jersey Turnpike. The compounding taxable equivalent yield for him is approximately 9.5%. He can get that yield year after year.