Muni Bonds: They're Not Just for Rich People Anymore

What are the yields on some tax-exempt bonds compared to what you will get on Treasuries?

McGuirk: Here's a bond we just bought: A 30-year, triple-A rated Texas municipal bond with a 4.3% yield and a 5% coupon. Compare that to the 30-year Treasury, which is at 4.22% yield. You're buying the municipal bond at a higher yield and it's tax exempt. If you're in the 35% tax bracket and buying a 30-year Treasury, you get left with 2.8% after taxes.

Are municipal bonds right for everyone?

McGuirk: Obviously, it varies based on your tax bracket. For higher tax brackets, it's a layup. But if municipal bond yields are 90% of the yields on Treasuries, which you are seeing, it doesn't take a high tax rate for them to make more sense.

Should investors buy individual municipal bonds or a muni-bond fund?

McGuirk: I do work for a mutual fund company. But I believe to my core that mutual funds for typical retail investors are a far better option because of the liquidity factor. You can get out of a mutual fund on any day at 100% of net asset value. When you try to sell a bond before maturity, a broker could charge you anywhere from 1% to 5%. And how would you know if you got a good price?

And a managed municipal bond fund gives you diversification. If I have a more-than 2% or 3% position in one of my funds, I watch it closely. For the typical retail investor, you would need a significant amount of money to properly diversify your municipal bond holdings.

How do you pick a municipal bond fund? Do you buy a broad national tax-exempt fund? Or one that's specific to the state that you live in?

McGuirk: In-state funds are great, particularly in high-tax states. If I had to choose between a Maryland and a national tax-exempt fund, which would be subject to state taxes, I would look at the dividend yield of the two funds. The yield on our national fund is 4.4%. On the Maryland fund, it's 4.3%. Since I am paying 7.75% in state tax in Maryland on the income from the national fund, that ultimately gets me less yield than on the Maryland fund.

And, of course, fees are important with a bond fund, especially at these low yields.