A wealthy investor is uncertain whether he should invest in taxable or tax-exempt bonds.?

What tax and nontax factors should he consider?

Assuming that the quality of the bonds is equal, the main factor I'd look at is which has the higher after-tax yield. To determine that, you have to know the person's marginal tax rate (i.e. what % of each additional dollar they make will go to state and local taxes). For an example, let's say that's 30%. Therefore, on a taxable bond yielding 6%, 1.8% (30% of 6%) will go to taxes leaving 4.2% for the investor to keep. If the tax-exempt bond yields more than that, I'd take it. If it yields less, I'd take the taxable bond. All that really matters is how much you get to keep.

If both bonds are equal in rating and secure, he should figure the tax implications of the taxable bonds, and compare the net gain with the net gain of the tax-exempt bonds. For example, if the taxable bonds pay 10% and he is in the 30% tax bracket, his annual net would be 7% on the investment. If the best he could do on a tax-exempt bond is 5.5%, he would net 1.5% more buying the taxable bond. Or if the taxable bond pays 6%, he would net 4.2% on the investment, and if the tax-exempt were 5.5%, he would net 1.3% more on the tax-exempt.

Consult a financial analyst. Tax-exempt bonds are not really tax free.
After a certain amount, the alternative minimum tax kicks in and you maybe liable to pay taxes. Tax-exempt bonds (municipal bonds) are also very volatile. And unless you invest in the state municipal bonds where you live, your dividends are not exempt from state tax.

In my opinion, money market securities are better investments right now than bonds. They pay a higher yield with lesser risk.

I know alot about the forex markets but not much as far as bonds but I use a Financial Adviser here in Colorado his name is Roger Bodor, His web site address is Http://rbodor.wradvisors.com He would be the best to answer your questions when you write to him tell him how much you are investing in what state you are living and what type of return are you seeking Good luck

When figuring alternative minimum tax, the tax exempt interest is added back in to determine gross income. This could lead to higher taxes.

I am a Portfolio Manager with over a decade of experience in the Stock Market and I suggest you to stay away from bonds.

First, you need to compare apples to apples from a risk standpoint. Most municipal bonds (tax free) are very secure. A lot of them are insured. Make sure that you compare AAA to AAA, etc.

Secondly, wealthy doesn't always mean that you are in a high tax bracket. Most of the time, if your tax bracket is 28% or higher, the tax equivalent yield of a muni will be higher than a comparable taxable bond. If you live in a state like California with an approx 9% state tax almost all of the time the tax free will have a higher TEY. The equation to figure out tax equivalent yield is Tax Free Bond Yield / 1 - Fed + State Tax Rate. For example; if you invest in a 4% muni and your fed tax bracket is 31% and your state is 9% then your TEY is 4% / 60% or 6.67%.

Lastly, like someone already mentioned, you need to be careful of the Alternative Minimum Tax (AMT). If you don't invest carefully and become subject to AMT what you thought was tax free investing could end up becoming taxable at approx 37%.

I would suggest that you contact a Financial Advisor that knows what they are doing and who will work closely with your Tax Professional.

Good Luck!!