Message Font: Serif | Sans-Serif
No. of Recommendations: 1
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.

Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.