Today's Best Savings Deal: Tax-Frees
For the time being, at least, tax-exempt money-market funds will put more money in your pocket than will their taxable cousins
By Carolyn Bigda

(MONEY Magazine) – What's New?

Tax-free money funds aren't just for the rich anymore. Tax-free yields now average nearly 2.2%; if you're in the 25% bracket, that's like getting 2.9% in a taxable account. Taxables pay just 2.4%, but if interest rates rise further, they may close the gap, since they respond faster to rate changes.

Best Strategies

• Do the math. To find out whether tax-frees make sense for you, divide the tax-exempt yield by one minus your tax rate. That will show you the taxable yield you'd have to get to beat tax-exempts.

• Go local. Boost your return with tax-free funds that specialize in issues of your home state. Your earnings will be free of state and (in some cases) local taxes, besides getting that federal tax break.

• Favor cheap funds. Look for fees below 0.6%, the average for money funds. High expenses will reduce your return.

Outlook

Tax-frees will have the edge into the fall. By year-end, taxable rates may hit 3.5%, making these funds a better bet for middle-income taxpayers.

SAVINGS NOTES AND SOURCES: CD and money-market account data as of May 10 from 100 Highest Yields ($124 for 52 issues; 800-327-7717). Tax-exempt and taxable money-market fund data as of May 10 from Money Fund Report (imoneynet.com); all have a minimum investment of $10,000 or less and assets of $25 million or more. Bond fund data as of April 30 from Lipper; all are medium- and high-quality funds without sales loads and with average maturities of three years or less. [1] Manager absorbed all or some operating expenses. [2] Closed to new investors. CREDIT NOTES AND SOURCES: All rates subject to change. Credit-card rates are for standard cards as of May 10 from Bankrate.com and are variable unless otherwise indicated. Survey does not include Internet-only cards or AmEx Blue. [1] Visa only. [2] Fixed rate. [3] MasterCard only. [4] Platinum and gold cards.