Municipal vs. Corporate Bonds: How to Choose

There are multiple factors to consider, including your tax rate.

How do you choose between corporate and municipal bonds? Both have characteristics that can be useful in your portfolio, depending on your goals and circumstances, but they're not right for every situation.

First, start with the type of account you're using:

  • Interest income from municipal bonds is generally exempt from federal and potentially state income taxes, so munis can make more sense than corporate bonds in taxable accounts, like a brokerage account, but it will depend on a few factors that we'll discuss below.
  • For tax-deferred accounts, such as an individual retirement account (IRA) or 401(k), corporate bonds generally make more sense because they usually pay higher yields in exchange for the lack of tax benefits that munis usually offer.

Beyond that, you should be aware of factors such as yields, maturity, and credit quality, as they can differ between the two types of bonds and influence which is more attractive. Here's what you should consider when deciding between investment-grade municipal and corporate bonds.