Are municipal bonds worth it, and how do I compare them using tax-equivalent yield?

Municipal bond interest is generally exempt from federal income tax, and from state tax too if the bond is issued in your home state. That makes their lower stated yields more attractive than they look – but only if you're in a high enough bracket. Use the tax-equivalent yield to compare: divide the muni's yield by (1 minus your marginal tax rate). A 3.5% muni for someone in the 35% federal bracket equals a 5.38% taxable yield (3.5% ÷ 0.65). If a comparable taxable bond pays less than that, the muni wins. For someone in the 12% bracket the math usually favors taxable bonds. Munis make the most sense in taxable accounts for high earners; never hold them in an IRA, where you'd waste the tax break.