A: Here are some guidelines for choosing the best type of investment based on your federal tax bracket:

—33 percent or higher federal tax bracket: If you're in one of these high brackets, you definitely need to avoid investments that produce taxable income. For tax year 2010, the 33 percent federal bracket started at $171,850 for singles, $190,550 for heads of household and $209,250 for married couples filing jointly.

—25 percent or 28 percent federal tax bracket: If you invest outside retirement accounts, in most cases, you should be as well or slightly better off in investments that don't produce taxable income. This may not be the case, however, if you're in tax-free money market and bond funds whose yields are depressed because of a combination of low interest rates and too high operating expenses.

—10 percent or 15 percent federal tax bracket: Investments that produce taxable income are generally just fine. You'll likely end up with less if you purchase investments that produce tax-free income, because these investments yield less than comparable taxable ones, even after factoring in the taxes you pay on those taxable investments.

Tax-free investments yield less than comparable investments that produce taxable earnings. But the earnings from tax-free investments can end up being greater than what you're left with from taxable investments after paying required federal and state taxes.

Tax-free money market funds, offered by mutual fund companies, can be a better alternative to bank savings accounts that pay interest, which is subject to taxation. The best money market funds pay higher yields and give you check-writing privileges. If you're in a high tax bracket, you can select a tax-free money market fund, which pays dividends that are free from federal and sometimes from state tax. You can't get this feature with bank savings accounts.

Unlike bank savings accounts, the Federal Deposit Insurance Corporation doesn't insure money market mutual funds. For all intents and purposes, though, money market funds and bank accounts have equivalent safety. Don't allow the lack of FDIC insurance to concern you, because fund companies haven't failed. And in those rare instances when a money fund's investments have lost value, the parent company has infused capital to ensure no loss of principal on the investor's part.

Just as you can invest in a tax-free money market fund, so too can you invest in tax-free bonds via a tax-free bond mutual fund. These funds are suitable for higher-tax-bracket investors who want an investment that pays a better return than a money market fund without the risk of the stock market. Bond funds are intended as longer-term investments (although they offer daily liquidity, they do fluctuate in value).