For individuals in higher tax brackets who are investing outside tax-deferred retirement accounts, municipal funds can be a smart investment. They provide federal-tax-free - and in some cases state-and-municipality-tax-free - income. (Generally, tax-free investments are not appropriate for tax-deferred retirement investing. In an IRA, 401(k), 403(b), and other retirement saving plans, your contributions and their earnings aren't taxed until you begin penalty-free withdrawals, which generally are available starting at age 59 ½.)
Tax-advantaged funds invest in securities issued by state and local governments to finance projects such as building schools, repairing roads, and constructing facilities like sports stadiums. Because the bonds in tax-advantaged funds offer tax-free income, they generally have a lower yield than taxable bonds.
Figuring your "taxable-equivalent yield"
However, when you compare the lower yield on a tax-advantaged fund with the after-tax yield of taxable bond funds, you'll find that tax-advantaged funds can be competitive, sometimes superior, investments.
An investment's "taxable-equivalent yield" measures what a taxable investment would have to return in order to keep pace with the yield on a tax-advantaged investment. To see what yield you would have to earn on a taxable investment in order to match the yield of a tax-advantaged investment, use the following chart:
Tax-advantaged funds and the alternative minimum tax
With increasing numbers of Americans becoming subject to the alternative minimum tax (AMT), considering tax-advantaged investments to reduce annual income can be more important than ever before.
The AMT is essentially an alternative way of figuring how much federal income tax you owe. The alternative calculation figures the minimum amount you should be paying. If you pay that amount in "regular" income tax, you're not subject to the AMT.
Sound confusing? It is. And if you have a gross income that's over $75,000, you may want to consult with a tax specialist or complete IRS Form 6251 to see if you're subject to the AMT.
Calvert's tax-advantaged funds
Calvert offers five tax-advantaged options, including four bond funds and one money market fund. Your financial advisor can help you determine which funds might be most appropriate for your portfolio, given your investment objectives.
Calvert Tax Free Reserves Limited-Term Portfolio (CTFLX)
This short-term, tax-free bond fund features a history of share price stability along with consistent, competitive returns <link to Sales Tool: A History of Stability-Even in Volatile Markets). Seeks to earn the highest level of interest income exempt from federal income taxes as is consistent with prudent investment management and preservation of capital.
Calvert Tax-Free Reserves Long-Term Portfolio (CTTLX)
Seeks to earn the highest level of interest income exempt from federal income taxes as is consistent with prudent investment management and preservation of capital.
Calvert National Municipal Intermediate Fund (CINMX)
Seeks to earn the highest level of interest income exempt from federal income taxes as is consistent with prudent investment management and preservation of capital.
Calvert Tax-Free Reserves Vermont Municipal Portfolio (CGVTX)
Seeks to earn the highest level of interest income exempt from federal and Vermont state income taxes as is consistent with prudent investment management and preservation of capital.
Calvert also offers one tax-advantaged money market mutual fund, the Calvert Tax-Free Reserves Money Market Portfolio (CTMXX).
Talk with your financial advisor today about which Calvert fixed-income investments may be best suited to your needs and overall investment profile. If you don't have a financial advisor, use our free Advisor FinderTM Service to locate a qualified investment professional in your area. You can also contact our Sales Department at 800.368.2748.
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