The 25% Solution

In the 25% Federal tax bracket (taxable income up to $128,500 on a joint return), municipal bonds are not especially attractive. You might earn 3.6% on a five-year tax-exempt bond.

You could buy a five-year Treasury note and earn 4.8%; in a 25% tax bracket you'd lose 1/4 of your yield (1.2%) to taxes and wind up with 3.6%, the same as from a muni.

For the same yield, you're better off with the safe credit risk that Treasuries offer. With greater taxable income, though, you would be in a higher tax bracket and thus net more with municipal bonds.

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