Municipal Bond ETFs as a Tax-Advantaged Income Strategy for High-Bracket Retirees

For retirees navigating the complexities of high tax brackets and the need for capital preservation, municipal bond ETFs have emerged as a compelling tool. These instruments combine the tax-exempt nature of municipal bonds with the liquidity and diversification benefits of exchange-traded funds (ETFs), offering a strategic edge in an era of elevated tax rates and market volatility. This analysis explores how retirees can leverage municipal bond ETFs to optimize after-tax returns while safeguarding principal, drawing on 2025 tax brackets and current market data.

The Tax Landscape for Retirees in 2025

The 2025 federal income tax brackets, as outlined by the IRS, impose seven marginal rates ranging from 10% to 37%. For retirees aged 65 and older, a temporary bonus deduction of $6,000 for single filers and $12,000 for married couples further adjusts effective tax liabilities according to IRS data. However, for those in the top marginal bracket-single filers with taxable income above $626,350 or married couples above $751,600-the 37% rate remains a significant drag on investment returns. In such cases, tax-exempt income becomes a critical lever for preserving wealth.

Tax-Equivalent Yield: A Key Metric for High-Tax Investors

The tax-equivalent yield (TEY) quantifies the return a taxable investment must generate to match the after-tax return of a tax-exempt municipal bond. The formula-TEY = municipal bond yield / (1 - tax rate)-reveals the power of tax-exempt income for high-bracket investors. For example, an investor in a 38.8% tax bracket would require a taxable bond yielding 5% to match a municipal bond yielding 4%, which has a TEY of 6.54%. This 2.5-percentage-point advantage grows more pronounced with higher tax rates. A married couple in California, facing a combined tax rate of 51.1%, would see a 4% municipal bond yield translate to a TEY of 8.18%, far outpacing most taxable alternatives.

Such calculations underscore the importance of TEY in portfolio construction. For retirees in high-tax states or with substantial taxable income, municipal bonds can deliver superior after-tax returns without sacrificing liquidity.

Municipal Bond ETFs: Balancing Yield and Capital Preservation

Actively managed municipal bond ETFs, such as the State Street® My2029 Municipal Bond ETF (MYMI), exemplify how these instruments can align with retirees' goals. MYMI targets capital preservation by focusing on bonds maturing in 2029 and employs a risk-aware strategy to overweight high-quality issuers. As of January 12, 2026, its tax-equivalent yield stood at 4.66%, assuming the highest marginal tax rate. This yield, while modest, reflects the fund's emphasis on safety over aggressive growth.

Passively managed ETFs like the iShares National Muni Bond ETF (MUB) and Schwab Municipal Bond ETF (SCMB) also offer competitive yields. MUB reported a 30-day SEC yield of 3.69% in December 2025, while SCMB's yield fluctuated between 3.31% and 3.82% during the same period. These variations highlight the importance of monitoring fund performance and aligning it with individual tax circumstances.

Capital Preservation: Municipal Bonds vs. Taxable Alternatives

While municipal bonds are not risk-free, they generally carry lower credit risk than corporate bonds and offer a unique tax advantage. U.S. Treasury funds, though safer, yield significantly less due to their taxability. For retirees prioritizing capital preservation, the trade-off between yield and risk is often favorable. Vanguard's research suggests that a balanced approach-combining municipal and taxable bonds-can enhance after-tax outcomes while reducing concentration risk. This strategy is particularly effective for households with fluctuating income levels, as it allows for dynamic tax optimization.

Moreover, municipal bonds provide diversification benefits. Their performance is less correlated with equities and other taxable fixed-income assets, making them a stabilizing force in a diversified portfolio. For retirees in states with high income taxes, triple-tax-exempt municipal bonds (exempt from federal, state, and local taxes) further amplify these advantages.

Conclusion

Municipal bond ETFs represent a sophisticated solution for high-bracket retirees seeking to reconcile income generation with capital preservation. By leveraging tax-equivalent yield analysis and strategic diversification, these instruments can transform tax-exempt income into a cornerstone of retirement planning. As tax rates remain elevated and market uncertainties persist, the case for municipal bonds grows stronger. For investors who prioritize after-tax returns and risk mitigation, the time to act is now.