Quick answer
Are Treasuries or municipal bonds better?
Municipal bonds usually pay more after tax for investors in the 32% federal bracket and above, because their interest is exempt from federal income tax and from the 3.8% NIIT. Treasuries are exempt from state and local income tax and carry no default risk, so they can win for lower brackets, for high-tax-state residents buying out-of-state munis, and inside tax-deferred accounts.
Key takeaways
- 01Treasury interest is state-tax exempt; muni interest is federal-tax exempt.
- 02A 3.5% muni equals 5.9% taxable at a 40.8% federal rate.
- 03IG munis defaulted 0.10% over 10 years vs 2.25% for IG corporates (Moody's, 1970–2019).
- 04Muni interest counts toward IRMAA MAGI.
| Treasury interest | Federal tax; state-exempt |
|---|---|
| Muni interest | Federal-exempt; often in-state exempt |
| NIIT on munis | None |
| Tax-equivalent yield | Muni yield ÷ (1 − tax rate) |
| 10-yr IG default (Moody's) | Munis 0.10% vs corporates 2.25% |
| IRMAA | Muni interest counts |
The Short Answer
Are Treasuries or municipal bonds better?
Municipal bonds usually pay more after tax for investors in the 32% federal bracket and above, because their interest is exempt from federal income tax and from the 3.8% NIIT. Treasuries are exempt from state and local income tax and carry no default risk, so they can win for lower brackets, for high-tax-state residents buying out-of-state munis, and inside tax-deferred accounts.
Compare using tax-equivalent yield: muni yield ÷ (1 − your tax rate). A 3.5% muni equals a 5.9% taxable yield for someone paying 40.8% federal tax. Note that muni interest still counts toward Medicare IRMAA income.
How They Are Taxed
How are Treasury and municipal bond interest taxed?
| Tax | Treasury interest | Municipal bond interest |
|---|---|---|
| Federal income tax | Taxed as ordinary income | Exempt (§103), for most public-purpose bonds |
| State and local income tax | Exempt (31 U.S.C. §3124) | Usually exempt in-state; taxed out-of-state in most states |
| 3.8% NIIT | Applies above the threshold | Does not apply |
| Alternative minimum tax | N/A | Private activity bond interest can be an AMT item |
| Medicare IRMAA MAGI | Counts | Counts (added back) |
Tax-Equivalent Yield
How do you compare a muni yield with a Treasury yield?
Convert the muni yield to what a fully taxable bond would need to pay. For a Treasury comparison, the Treasury is still state-exempt, so use your federal rate (plus NIIT) for the muni and compare with the Treasury's yield.
Chart
Tax-equivalent yield of a 3.5% muni by federal bracket (2026)
Calculator
Muni vs Treasury after tax
Enter both yields and your marginal rates. The Treasury is state-exempt; the in-state muni is exempt from both.
Treasury after tax
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In-state muni after tax
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Muni advantage (points)
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Muni tax-equivalent yield (fed + state)
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Credit Risk
Are municipal bonds as safe as Treasuries?
No bond is as safe as a Treasury, which is backed by the full faith and credit of the US government. Investment-grade munis have, however, defaulted far less often than comparably rated corporates: Moody's data for 1970–2019 show a 10-year cumulative default rate of 0.10% for investment-grade munis vs 2.25% for global investment-grade corporates.
Chart
10-year cumulative default rate, investment grade (1970–2019)
Where Embark fits
Bonds need cash to buy. What could your appreciated stock target in income instead?
Run your ticker to see what a position could target with $0 tax at contribution.
- Starts with appreciated stock you already own instead of new cash for a credit fund
- §721 in-kind contribution: $0 tax at contribution, no sale to fund the allocation
- Targets 10%+ annual income; a target, not a guarantee, with a 3-year lock-up
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When Each Wins
When are Treasuries better than munis?
Lower brackets
At 22–24%, the tax saving often does not cover munis' lower yield.
Tax-deferred accounts
In an IRA the exemption is wasted; hold taxable bonds there.
Out-of-state munis in a high-tax state
You pay state tax on them, while Treasuries stay state-exempt.
Liquidity and safety
Treasuries trade in the deepest bond market in the world.
Near Medicare age
Munis do not lower IRMAA MAGI. See how to avoid IRMAA.
Embark
Where does Embark fit for a high-bracket investor?
Both Treasuries and munis are bought with cash. If most of your capital is appreciated stock, buying bonds means selling it first and paying capital gains tax. Embark accepts the shares in kind under §721, with $0 tax at contribution, and targets 10%+ annual income. That income is taxable, and the risk is equity-linked, not bond-like. Target, not guarantee; 3-year lock-up; accredited investors. See where high earners invest for income.
FAQ
Frequently asked questions
Are Treasury bonds tax-free?
Treasury interest is exempt from state and local income tax but taxed federally.
Are municipal bonds tax-free?
Interest on most public-purpose munis is exempt from federal income tax and, for in-state bonds, usually from state tax too.
What is the tax-equivalent yield formula?
Tax-exempt yield ÷ (1 − marginal tax rate).
Do municipal bonds avoid the 3.8% NIIT?
Yes. Tax-exempt interest is not net investment income.
Do municipal bonds affect Medicare premiums?
Yes. Tax-exempt interest is added back to MAGI for IRMAA.
Should I hold munis in an IRA?
Generally no. The tax exemption adds nothing inside a tax-deferred account.
Sources
Primary sources
Sources
- 26 U.S. Code §103: Interest on state and local bonds
- 31 U.S. Code §3124: Exemption of US obligations from state and local taxation
- IRS Publication 550: Investment Income and Expenses (Treasury and municipal interest)
- 26 U.S. Code §1411: Net investment income tax
- IRS Revenue Procedure 2025-32: 2026 tax brackets
- Loomis Sayles, citing Moody's 1970–2019 default study: municipal vs corporate default rates
- 20 CFR §418.1010: IRMAA MAGI includes tax-exempt interest
- TreasuryDirect: Treasury marketable securities
Cite this article
Embark Funds Research. “Treasury vs Municipal Bonds The After-Tax Comparison.” Embark Funds, updated October 29, 2026. https://www.embarkfunds.com/insights/treasury-vs-municipal-bonds
Not tax, legal or investment advice: This article is educational and is not tax, legal, investment or Medicare advice. Rules and dollar amounts change every year and depend on your facts. Work with a CPA or financial planner before acting. Embark income figures are targets, not guarantees. Contributed shares have a 3-year lock-up, and Embark is open to accredited investors only.
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