Are tax-exempt mutual funds right for you?

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 these two questions:

1. 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.

2. 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.

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.

See a list of Vanguard tax-exempt money market funds

See a list of Vanguard tax-exempt bond funds