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Some tax-free mutual funds that invest in municipal securities, seek to provide investors with a high level of income free from federal income tax and in some cases free from state income taxes as well1. Depending on your tax bracket, tax-free mutual fund yields can actually offer you more after-tax income than a taxable investment with higher pre-tax yields2. This benefit grows as your tax rate increases. Below is a comparison of tax-free yield and tax equivalent yield, assuming a combined state and federal tax rate from 15% to 40%.

Combined Marginal Tax-Free Yields
State & Federal 4.00% 4.5% 5.00% 5.50% 6.00%
Tax Rate Equivalent Taxable Yields
15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
20.00% 5.00% 5.63% 6.25% 6.88% 7.50%
25.00% 5.33% 6.00% 6.67% 7.33% 8.00%
30.00% 5.71% 6.43% 7.14% 7.86% 8.57%
35.00% 6.15% 6.92% 7.69% 8.46% 9.23%
40.00% 6.67% 7.50% 8.33% 9.17% 10.00%
This chart is for illustration purposes only. There can be no guarantee that any mutual fund will achieve any particular tax-exempt yield. The tax brackets shown are not intended to represent the tax rates of any given state. Your tax advisor can provide information regarding current tax legislation and how tax laws affect your own personal financial circumstances.

1 The income from mutual funds that invest in "tax-free" municipal securities may be subject to state and local taxes. Some investors may also be subject to the federal alternative minimum tax (AMT).

2 Consult your tax advisor regarding tax consequences.

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