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Step 3: Is Tax-Free Investing Right For You?
If keeping what you earn is important to you, then you may
want to consider tax-free municipal bonds funds. Tax-free bond funds typically
provide lower yields than taxable bond funds, without being subject to federal or,
in many cases, state income taxes.
You may be surprised to learn that you need to earn a significantly higher
yield from a taxable bond fund to derive the same after-tax income you would
earn from a tax-free investment.
Taxable Equivalent Returns
| Based on a federal tax bracket of: |
| |
27% |
30% |
35% |
38.6% |
| Joint Return |
$43,850-$105,950 |
$105,950-$161,450 |
$161,450-$288,350 |
Over $288,350 |
| To equal a tax exempt return of: |
You would need a taxable yield of: |
| 3.00% |
4.11% |
4.28% |
4.62% |
4.89% |
| 4.00% |
5.48% |
5.71% |
6.15% |
6.51% |
| 5.00% |
6.85% |
7.14% |
7.69% |
8.14% |
| 6.00% |
8.22% |
8.57% |
9.23% |
9.77% |
| 7.00% |
9.59% |
10.00% |
10.77% |
11.40% |
How Tax-Free Bond Funds Work
City and state governments issue municipal bonds to help raise money for
bridges, water and sewer systems, schools, and other public projects. Since these
bonds promote important civic development, the government allows the interest paid to
be exempt from taxation. By investing in municipal bonds, tax-free bond funds can
provide income that’s free from federal and sometimes state income taxes.
Are Tax-Free Bond Funds Right For You?
Tax-free bond funds may make sense if you are...
In or above the 30% federal income tax bracket
Looking to earn tax-free income
Interested in earning more income than tax exempt money market funds provide
A conservative investor who can tolerate some fluctuation in portfolio value
To learn more about tax-free bond funds review, Armada’s Tutorial on Investing.
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