The Benefit of Municipal Investing

For many income-oriented investors, it's not what they earn that's important…it's what they keep. With municipal investments, the income you earn is generally exempt from federal income tax. So you keep more of what you earn. Even if you're taxed at a lower rate, the difference in income can be substantial when taxes don't take a bite out of your earnings.

Municipal Investing Chart

How Do You Determine Whether Municipal Investing Is Right for You?
There are several factors you should consider when choosing a taxable OR tax-exempt income investment, like the time horizon for your investment, and your tolerance for risk. The higher the level of income you want to pursue, the greater level of price fluctuation you should be prepared to tolerate. Consider long-term investments or longer-term average maturity funds – which tend to have greater price fluctuation – for longer-term goals.

The decision between whether a taxable or tax-exempt bond or bond fund is right for you can be made in part by comparing the yields. Since the yields of municipal investments and your tax rate may change over time, you should constantly reevaluate the benefits of municipal investments in your portfolio. To discover how a taxable and tax-free yield compare, use the following formula:

Taxable Equivalent Yield = Tax-free Yield / (1 - your tax rate)

The calculator below allows you to convert a federally tax-exempt yield into a taxable equivalent – therefore you can compare apples to apples.

Take a Look at the Following Hypothetical Example

Taxable Equivalent Yield
(in the 35% federal income tax bracket)
Taxable money market fund 1.50%
Federally tax-exempt money market fund 1.25% 1.92%

The Benefit of Municipal Investing Calculator


An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

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You keep more of what you earn. For example, you have a $10,000 investment that earns 5% annually. If it is invested in a tax-free investment, you keep all $500 in earnings. In a taxable investment, at a 25% tax rate, you keep $375, paying $125 in taxes. At a 28% tax rate, you keep $360, paying $140 in taxes. At a 33% tax rate, you keep $335, paying $165 in taxes. At a 35% tax rate, you keep $325, paying $175 in taxes.

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  • Not FDIC Insured
  • No Bank Guarantee
  • May Lose Value