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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121096  
Subject: Re: MMF - Yields vs Maturity Date: 12/6/2002 11:42 AM
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3) how do you know whether to choose a tax-free or taxable.
any simple determination?


Quick answer: If you're in the 38.6% tax bracket, go with the tax-free. Otherwise, don't.

Longer answer: You need to compare the after-tax return from a taxable fund to the return from a comparabe tax-free fund. A simplistic way to do this is to multiply the return from the taxable fund by 1 minus your tax bracket. It gets more complicated if the fund is also state tax free and if you're itemizing your deductions.

I've found that it's not unusual to look at the offerings from a single fund family and find that after taxes the returns are all within a few hundredths of a percent of each other if you assume the highest marginal tax rates. I take that as evidence that: 1) arbitrage is at work, and 2) tax-free investing is for taxpayers in the highest marginal brackets.

--Peter
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