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Are tax-exempt mutual funds right for you?

Tax-exempt funds can be a smart way to reduce your income taxes, but they're not for everyone.

Find out if you could be saving on taxes

Who doesn't want a lighter tax bill? Although tax-exempt mutual funds usually produce lower yields, you generally don't have to pay federal taxes on earnings from tax-exempt money market and bond funds. And you can save even more if you live in a state that offers similar exemptions.

But before you invest, ask yourself a few questions:

Am I investing outside of an IRA or another retirement plan?

You won't gain anything more by including a tax-exempt mutual fund in an already tax-advantaged account, like an IRA. Instead, you'd actually be giving up potential yields.

Am I in one of the higher tax brackets?

If you're not, tax-exempt funds probably aren't the right fit. You likely won't save enough in taxes to make up for the lower yields you typically get from a tax-exempt fund.

If you answered "yes" to both of these questions, a tax-exempt fund might be worth a look.

Choose your tax-exempt funds

If you've determined you're a good candidate to start investing in tax-exempt funds, take a look at the funds you have to choose from.