Do you really want a tax-free investment?
Friday, April 21st, 2006
Categorized as: Savings Bond news • Savings Bond taxes
St Petersburg Times Personal Finance Editor Helen Huntley is as frustrated as I am with investors who would rather lose money than pay taxes. In response to the second question in her column last Sunday, she writes:
What matters is not whether you owe taxes, but how much you have left after the taxes are paid. It sounds as though you would have preferred for your savings bonds not to increase in value.
If you want a short-term tax-free investment, look for a tax-free money market mutual fund. You can find the top-yielding taxable and tax-free funds in the Sunday business section under “money market yields.”
But don’t assume tax-free is better than taxable until you run the numbers. Last week the top-yielding taxable fund paid 4.74 percent while the top-yielding tax-free fund paid 3.19 percent. If you are in the 25 percent tax bracket, you would get to keep 75 percent of that 4.74 percent taxable yield, or 3.56 percent. That means the best taxable fund beats the best tax-free fund. On the other hand, if you are in the 35 percent tax bracket, the tax-free fund is the winner.
Don’t know what tax bracket you’re in? My page on federal income tax brackets will help you figure that out right now.