It is important to know your marginal tax rate when trying to select between taxable bonds or bond funds versus tax- exempt (municipal) bonds or bond funds. Perform the following calculation to determine which bond investment provides a higher after-tax return.

Tax Free Yield ÷ (100% - your marginal tax rate) = Equivalent Taxable Yield. If the equivalent taxable yield is higher than the taxable bond or fund being considered, the municipal bond has a higher after-tax return. Otherwise, the taxable bond offers a higher after-tax return.