The higher your marginal tax bracket, the more attractive municipal bonds typically are for your portfolio. If you are considering including muni bonds in your investment portfolio, consider these tips:

• Compare the returns from municipal bonds to other bond types. Since municipal bond interest is exempt from federal, and sometimes state and local income taxes, your marginal income tax bracket is a major factor when deciding whether to include municipal bonds in your portfolio. Thus, you should

  determine how a muni bond's yield compares to the after-tax yield of a comparable taxable bond.

To do that, calculate the taxable equivalent yield of the municipal bond. If you're not investing in a municipal bond issued within your resident state, the calculation is: the taxable equivalent equals the tax-exempt interest rate divided by one minus your marginal tax bracket. For instance, if you are in the 25 percent tax bracket and are considering a municipal bond with a yield of 5.2 percent, the taxable equivalent percentage is 6.93 percent (5.2 percent divided by one minus 25 percent). Thus, you should compare 6.93 percent to any corporate bonds you are considering.

• Review the bond's credit quality. While municipal bond defaults are rare, they do occur, so carefully review the credit quality. You may want to stick with investment-grade ratings, which means that the issuer is considered financially stable and unlikely to default. The four highest rating categories are considered investment grade, with the lower categories considered speculative.

• Select a maturity date with care. Interest rates are typically higher for bonds with longer maturities. Thus, it can be tempting to purchase longer maturities to lock in higher rates. However, if you sell the bond before maturity, changes in interest rates can significantly affect your bond's market value. Thus, you may receive more or less than the par value. It may be better to select a maturity date that coincides with your need for the principal.

• Hold a diversified portfolio of at least seven to nine different issues. You can start out with fewer than that, but your ultimate goal should be to hold a diversified portfolio.

• Don't over-diversify. While you want a diversified portfolio, an excessive number of individual issues can be difficult to monitor. For each, you need to ensure that interest payments are received and reinvested and monitor credit quality, maturity dates, and call dates.

• Consider bonds issued in your resident state. Purchasing muni bonds issued in the state you reside in typically means that your interest income is also exempt from state and local income taxes.

• Review your holdings periodically. Review the credit ratings of all your municipal bonds at least annually to ensure the quality hasn't deteriorated. Check the call provisions so you aren't surprised by a call in the coming year. Also, review your holdings to see that they are still consistent with your overall investment objectives and asset allocation.