What about Tax Equivalent Yield (TEY) investing?

Back in my designation studies, we certainly studied the tax code, but it was primarily focused on accumulating money, particularly in the most tax-efficient way as possible, not necessarily spending retirement wealth as tax-efficiently as possible. For those who had after-tax brokerage accounts, a popular tax-efficient strategy would be to invest in municipal bonds. Municipal bonds are federally tax-free, and if you bought state municipal bonds for your state of residence, they are state tax-free as well.

(Quick disclosure: this blog article is not giving any securities investment advice and is for educational and informational purposes only.) Note that municipal bonds *may* not make sense in a tax-deferred account such as a 401(k), IRA, or other similar accounts. They can make sense as part of an asset allocation strategy, but it doesn't make sense for an account that already has tax-deferral as it grows. Okay, so if you have an after-tax brokerage account, and you decide that you want to invest in municipal bonds... what is this 'tax equivalent yield'? Take a look at this chart:

What this chart is saying is that the tax-free yield is far more valuable the higher your particular tax bracket is. The actual net yield to your portfolio is 3.7%. If you're in the highest bracket, you'd have to earn 5.9% in order to NET the 3.7% after taxes.

Here's two problems that are not identified with this 'tax-efficient' method of investing:

1. This only affects at most TWO areas of the tax code while you are accumulating wealth: taxation on the federal level and possibly taxation on the state level (if you bought a state-issued municipal bond in your state of residence).
   

2. This method of investing has nothing to do with how efficiently you can SPEND your money in retirement.

Point #2 is probably the most hidden aspect of this, yet it is out there in the tax code for anybody to see it.

Here's the interesting thing: Non-taxable interest (such as interest earned from municipal bonds) is a factor in determining if your Social Security will be subject to being taxed!

Here's the link to the Social Security Administration about the taxation of benefits: https://www.ssa.gov/benefits/retirement/planner/taxes.html

Here's the Provisional Income formula as it applies for Social Security benefits:

• Your adjusted gross income (such as from a job or distributions from a 401(k)/IRA)

• + Non-Taxable interest (such as from municipal bonds)

• + 1/2 of your Social Security benefits

• = your "combined income"

Now, that may not be so bad while you're accumulating wealth... but tax-free isn't so tax-free when it comes to spending in retirement while you are collecting on your hard-earned benefits.

That's why we look at the Capital Equivalent Value for determining how much money you'd need in one of the MOST TAX-EFFICIENT PLACES... to spend money in the most tax-efficient manner... compared to having money in the LEAST (or less) TAX-EFFICIENT PLACES.

For more information on the Capital Equivalent Value, read this blog article here: https://www.davidkinderfinancial.com/post/2018/07/16/what-investment-rate-of-return-would-you-need-to-equal-the-tax-and-economic-contract-bene