Well it's President's Day, and thanks to our forefathers taxes are an inevitability. (I'll avoid the cliche, but you know what I'm thinking.)


In any case, taxes are a big deal when it comes to investing. Along with expenses, they take a big bite out of your returns. But most of us don't consider the after-tax returns of a mutual fund or other investment. But it's just as important a factor as fees, management and strategy.

That's why municipal bonds look so appealing. These fixed income investments issues by states and other local governments are a great way to get tax-free income without incurring a whole bunch of risk.

And according to a study by the folks at Franklin Templeton, the after-tax returns on municipal bonds are second only to stocks over the past twenty years. Between 1985 and 2005, the S&P 500 put up annualized gains of 9.71% taking into account the tax impact; muni bonds 8.14%; treasuries 6.68%; and corporate bonds 6.49%. All this assumes an investor in the top tax bracket.

Of course, your muni choice--say between a national muni fund or a state-specific muni fund--depends on your situation. Investors in a high-tax state like New York or California may be better off in a state-specific fund. While those in Texas and Florida may find a national muni fund a better option.

Do the math. Morningstar has a really useful calculator to help you determine your best options.

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