How to Compute Tax-Free Money Market Funds
- 1). Determine the yield on the tax-free investment you are considering. Check the prospectus for this information.
- 2). Check your tax bracket by visiting the IRS website or talking to your tax planning professional. This information is needed to convert the tax-free yield to its tax-equivalent yield. Your tax bracket is based on the amount of your income---as your level of income rises your tax bracket goes up with it.
- 3). Subtract your tax rate from 1. For instance, if your tax rate is 28 percent, subtract .28 from 1, for a total of .72.
- 4). Divide the tax-free yield by the number you just calculated. For instance, if your tax-free fund yields 4.50 percent, you would divide that 4.50 percent by .72, for a tax-equivalent yield of 6.25 percent. You would have to earn 6.25 percent to break even with the tax free 4.50 percent yield.