Tax-Exempt Bonds for Higher Tax-Bracket Investors
When selecting an investment, most investors consider important issues such as safety, yield and growth potential. Yet, few take into consideration the impact that taxes can have on their investment.
For example, an investor in the 31 percent tax bracket could be paying $31 out of every $100 to taxes! This investor's 5 percent yield equals just 3.5 percent after taxes!
Municipal bonds are among the few remaining sources for tax-free income. The popularity of municipal bonds has grown steadily. Why? Because they pay income which is exempt from federal taxes. Municipal bonds let investors keep more of what they earn.
What are Municipal Bonds?
Municipal bonds are an important way for state and local governments to raise money to finance public improvements. The money from bond issues may be used for projects like:
- Building or improving roads and bridges
- Building schools or health-care facilities
- Protecting water or other environmental needs
- Providing public transportation, as well as a variety of civic projects.
The interest received from municipal bonds is exempt from federal income taxes to encourage people to invest in such projects. The interest may not be exempt form state and local taxes. Also, some investors are subject to the alternative minimum tax.
Tax-Exempt vs. Taxable Income
| Taxable Income - Single Individual | 2007 Federal Income Tax Bracket | Tax-Exempt Yield of 4% Compares to a Taxable Yield of | Tax-Exempt Yield of 5% Compares to a Taxable Yield of | Tax-Exempt Yield of 6% Compares to a Taxable Yield of |
|---|---|---|---|---|
| $0 - $7,825 | 10% | 4.4% | 5.6% | 6.7% |
| $7,826 - $31,850 | 15% | 4.7% | 5.9% | 7.1% |
| $31,851 - $77,100 | 25% | 5.3% | 6.7% | 8.0% |
| $77,101 - $160,850 | 28% | 5.6% | 6.9% | 8.3% |
| $160,851 - $349,700 | 33% | 6.0% | 7.5% | 9.0% |
| $349,701 and above | 35% | 6.2% | 7.7% | 9.2% |
Taxable equivalent yields for the tax-exempt returns (4%, 5% and 6%) shown are calculated based on the maximum marginal tax rate at each tax bracket. These rates and brackets are for single (unmarried) persons and subject to change. You should consult your tax advisor regarding more recent tax legislation and how tax laws affect your own personal financial circumstances. Yields are for illustrative purposes only and do not indicate fund performance.
Before investing in mutual funds, investors should carefully consider the investment objectives, risks, charges and expenses of the funds. This and other information is contained in the free prospectus, which can be obtained by:
- Calling 1.800.222.5852 and requesting a prospectus
- Downloading a prospectus (A, B & C shares)
- Downloading a prospectus (J shares)
- Requesting a prospectus be mailed to you (A, B & C shares)
- Requesting a prospectus be mailed to you (J shares)
Please read the prospectus carefully before investing. See the mutual fund section of our site for a description of the different share classes.
