Municipal Bonds vs. U.S. Treasuries: A Look at Tax-Free Income Opportunities in Connecticut
- Marc Lowe
- Oct 20
- 4 min read
Updated: Oct 23
As I was reviewing tax returns for the past few months. A common theme came up, most or all of the interest from short term debt came up as taxable for every return I reviewed.
When it comes to fixed-income investing, two of the most common options are U.S. Treasury bonds and municipal bonds (often called “munis”).
Both are considered less risky compared to corporate bonds or stocks, but they differ in one key way: the potential for tax-free income. Understanding this difference is essential for investors who want to maximize their after-tax returns—especially those in higher tax brackets.
What Are Municipal Bonds?
Municipal bonds are issued by state and local governments to fund public projects such as schools, highways, or water treatment facilities. In exchange for lending money to the municipality, investors receive regular interest payments and, at maturity, the return of their principal.
The key feature that makes munis attractive is that the interest income they pay is often exempt from federal income taxes. In many cases, if you buy bonds issued in your home state, the income can also be exempt from state and local taxes. This makes municipal bonds a powerful tool for generating tax-advantaged income.
How They Differ From U.S. Treasuries
U.S. Treasury bonds are issued by the federal government and are backed by the “full faith and credit” of the United States. They are considered the safest bonds in the world because the government has the power to tax and print money to meet its obligations. However, Treasury interest is taxable at the federal level (though exempt from state and local income taxes).
Municipal bonds, by contrast, carry a little more risk because they rely on the financial health of a city or state. While defaults are rare, they do happen. This added layer of risk is one reason why municipal bonds often offer yields that can be higher than comparable U.S. Treasury bonds—a surprising fact given their potential tax-free benefits.
Tax-Equivalent Yield Advantage
For high-income earners, the true value of municipal bonds becomes clear when looking at “tax-equivalent yield.” For example, a muni paying 3% tax-free may actually be worth more than a taxable Treasury paying 4% once you factor in federal and state taxes. The higher your tax bracket, the more powerful this advantage becomes.
But it gets better....currently as I am writing this, there are plenty of examples of Muni bonds in Connecticut ( Where I am writing this) paying more than U.S. Treasuries and are tax-exempt from Federal Tax, State Tax & local Tax.
This makes municipal bonds especially appealing for affluent investors who want steady income without triggering additional tax burdens.
Keep in Mind, I am speaking about buying the Muni bonds directly. Purchasing them through a Money Market Municipal Bond Fund often does not allow the state and local tax exemptions.
The Trade-Off: Safety vs. Yield
Treasuries: Safest option, federally taxable, lower yields.
Munis: Slightly higher risk, potentially higher yields, often federal and state tax-free.
The choice often depends on your personal situation—your income tax bracket, your state of residence, and your tolerance for risk.
Bottom Line
Municipal bonds provide a unique opportunity to generate federal (and often state) tax-free income, making them an essential consideration for investors seeking efficiency in their after-tax returns. While they may carry slightly more risk than U.S. Treasuries, the potential for higher yields and significant tax savings can make munis a smart addition to a well-rounded investment strategy.
For investors in Connecticut—or any high-tax state—the benefits can be even greater, since local munis may allow you to avoid both state and federal income taxes. As always, it’s wise to consult with a financial planner or tax professional to see how municipal bonds fit into your overall plan.
About The Author
Marc Lowe is the Founder & President of In The Money Retirement Planning. He is a Certified Financial Planner and member of NAPFA National Association of Personal Financial Advisors, XY Planning Network & Fee-Only Network. He works with retirees and those approaching retirement. He has over a decade of experience helping these folks grow their net worth, organize their finances and build better lives for themselves and their families.
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