Question: I just turned 57 and plan on retiring in exactly 4 years. If I can get a 3.5% return on my 401K, IRA and brokerage account and combine it with my pension and SS payment, I will have an income of 90% of my present salary. What I want to know is if I change all the instruments in these accounts to tax free munis, how are the withdrawals treated? In other words, I would get tax free dividends paid into a tax deferred account, how is that taxed when I make a withdrawal? : Jonathan, Oakland, CA

Answer: There’s a saying in the personal finance industry: “Don’t put a tax shelter inside of a tax shelter.” It’s sound advice.

The interest on tax-exempt municipal securities is free from federal income tax, and sometimes from state and local government taxes. But if you put tax-exempts into a tax deferred retirement account you’ll give up the tax-free interest payments. When you withdraw the money you’ll pay your ordinary income tax rate on all of it–100%.

So, it doesn’t make sense to put tax-exempt securities into your IRAs or 401(k).

You could own tax-exempts in your brokerage account if it’s a taxable account, however. Tax-exempt securities are best held in taxable accounts and it’s usually a better investment for folks in the highest income brackets.

Right now, tax-exempt yields are unusually attractive relative to U.S. Treasury securities. The reason: The greater risks of owning tax-exempts considering all the turmoil in state and local government budgets. (Think Wisconsin, California and Illinois.)

The traditionally dull coupon-clipping muni market for the well-heeled retired is anything but staid these days.