The previous post Which Vanguard Money Market Fund Is the Best at Your Tax Rates covered Vanguard money market funds. Vanguard has the best money market funds because they charge the lowest fees in their funds. However, many people — myself included — have a brokerage account at Fidelity Investments. It’s more convenient to keep cash and other investments in one place. A Fidelity money market fund is still quite good enough if you don’t need absolutely the highest yield.
If you prefer to keep your cash and other investments at Charles Schwab, please read Which Schwab Money Market Fund Is the Best at Your Tax Rates.
As I wrote in No FDIC Insurance – Why a Brokerage Account Is Safe, when you keep your cash in a money market fund at a broker, the safety of your money doesn’t depend on the financial health of the broker. The safety comes directly from the safety of the holdings in the money market fund. Your money market fund is safe when the fund’s underlying holdings are safe.
Why Money Market Fund
The reason to keep your cash in a money market fund, as opposed to a high yield savings account, is that you’re not depending on any bank to set their rate competitively. You automatically get the market yield minus the fund manager’s cut, no more, no less, sort of like when you invest in an index fund. You’re not moving to another bank because it’s offering a promotional rate. You’re not moving again when that bank decides to lag behind. See my Guide to Money Market Funds & High Yield Savings Accounts.
Fidelity offers at least 18 money market funds of different types. That’s not counting Institutional funds and funds that are only available in certain account types. These 18 money market funds differ in their underlying holdings and tax treatment at both the federal and the state levels. Which one is slightly better for you than another depends on your preference for convenience and your federal and state tax brackets.
Taxable Money Market Funds
Seven of the 18 Fidelity money market funds are taxable money market funds. You pay federal income tax on the income earned from these funds. A portion of the income earned in some funds is exempt from state income tax in most states.
The quoted yield on any money market fund is always a net yield after the expense ratio is already deducted. You don’t need to deduct it again.
Core-Eligible Money Market Funds
Every Fidelity brokerage account has a core position. You don’t have to do anything extra to buy or sell the core position. Any cash you transfer into your Fidelity brokerage account will automatically land in the core position. Any cash you transfer out of your Fidelity brokerage account will come out of the core position.
Your choices in the core position may include one or more of these money market funds depending on the account type:
|Fund||Expense Ratio||2022 State Tax Exemption|
|Fidelity Government Cash Reserves (FDRXX)||0.34%||29% (0% in CA, CT, NY)|
|Fidelity Government Money Market Fund (SPAXX)||0.42%||31% (0% in CA, CT, NY)|
|Fidelity Treasury Money Market Fund (FZFXX)||0.42%||30% (0% in CA, CT, NY)|
The income earned in these funds is fully taxable at the federal level. A percentage of the income is exempt from state income tax. That percentage varies from year to year.
There isn’t much difference among these three core-eligible funds. If Fidelity Government Cash Reserves (FDRXX) is an option, I would choose that one as the core position because it has a lower expense ratio.
If you’d like to see what options you have as your core position, click on your core position marked with two asterisks on the Positions page and then click on the Change Core Position button. If you see FCASH as an option in your account, don’t choose that one because FCASH isn’t a money market fund.
All money market funds except the core position require a buy order to get money into them but you don’t have to sell manually. If your core position isn’t sufficient for a debit, Fidelity will automatically sell from your money market fund to cover the difference.
Fidelity Cash Management Account only uses bank sweep as the core position. You can’t change it but you can still buy a money market fund manually in a Cash Management Account.
Prime Money Market Funds
Fidelity Money Market Fund (SPRXX) and Fidelity Money Market Fund Premium Class (FZDXX) are prime money market funds. They invest in repurchase agreements, CDs, and commercial paper. Prime money market funds pay more but they have a slightly higher risk.
The Premium Class fund (FZDXX) requires a $100,000 minimum investment in a taxable account and a $10,000 minimum investment in an IRA. The minimum is only required to get started. You can drop below the minimum after you have the fund. The regular class fund (SPRXX) doesn’t require a minimum investment but it pays less than the Premium Class fund because it has a higher expense ratio (0.42% versus 0.36%).
The income earned from these prime money funds is fully taxable at the federal level. A small percentage of the income is exempt from state income tax. That percentage varies from year to year. It was 0% in 2022 and 4% in 2021 (0% in CA, CT, and NY).
Government Money Market Funds
Fidelity Government Money Market Fund Premium Class (FZCXX) and Fidelity Treasury Only Money Market Fund (FDLXX) are government money market funds. They only invest in government securities and repurchase agreements that are collateralized by cash or government securities.
Think of repurchase agreements (“repo”) as a deal with a pawn shop. Entities give collaterals to the money market fund for short-term cash. They’ll come back later to buy back (“repurchase”) their collaterals at a higher price. If they don’t fulfill the repurchase agreement, the money market fund will sell those collaterals. Repurchase agreements aren’t guaranteed by the government. Their safety comes from the collaterals.
A government money market fund is safer than a prime money market fund. Fidelity Treasury Only Money Market Fund (FDLXX) is the safest because it invests more in Treasuries. It pays a little less though.
The income earned from these two funds is fully taxable at the federal level. A percentage of the income is exempt from state income tax. That percentage varies from year to year.
|Minimum Investment||State Tax Exemption in 2022|
|Fidelity Government Money Market Fund Premium Class (FZCXX)||$100,000 ($10,000 in IRA)||31% (0% in CA, NY, CT)|
|Fidelity Treasury Only Money Market Fund (FDLXX)||$0||94%|
Among the seven taxable money market funds, if you value the convenience of no extra step to buy, you can leave the money in one of the core-eligible funds. If you want a higher yield and you’re not concerned about the slightly higher risk, you can go with one of the prime money market funds (FZDXX or SPRXX). If you want the most solid peace of mind at the cost of a slightly lower yield, you can choose the Treasury Only fund (FDLXX) for extra safety and the additional state income tax savings. Finally, the Government Money Market Fund Premium Class (FZCXX) is a good middle ground with safer holdings than the prime funds and you’re not giving up too much yield. I have my cash in FZCXX.
Remember to claim the state tax exemption when you do your taxes. See how to do it in State Tax-Exempt Treasury Interest from Mutual Funds and ETFs.
Single State Tax-Exempt Money Market Funds
Fidelity offers tax-exempt money market funds specifically for investors in higher tax brackets in California, Massachusetts, New Jersey, and New York. These funds invest in high-quality, short-term municipal securities issued by entities within the state. Income from these funds is tax-exempt from both the federal income tax and the state income tax. They’re sometimes called “double tax-free” funds.
The fund for each state has two share classes — a regular share class and a Premium Class. The Premium Class fund requires a $25,000 minimum investment. The regular class fund has no minimum but it pays a little less because it has a higher expense ratio (0.42% versus 0.30%).
|Regular Share Class|
The yield on these single state tax-exempt money market funds is lower than the yield on the seven taxable money market funds but the federal and state tax exemption makes up for it when you’re in a high tax bracket.
Remember to claim the state tax exemption when you do your taxes. See how to do it in State Tax-Exempt Muni Bond Interest from Mutual Funds and ETFs.
National Tax-Exempt Money Market Fund
Fidelity offers three tax-exempt money market funds for investors in higher tax brackets outside of California, Massachusetts, New Jersey, and New York. These funds are more diversified than the eight single-state funds because they invest in short-term, high-quality municipal securities from many states.
|Expense Ratio||Minimum Investment|
|Fidelity Municipal Money Market Fund (FTEXX)||0.41%||$0|
|Fidelity Tax-Exempt Money Market Fund (FMOXX)||0.47%||$0|
|Fidelity Tax-Exempt Money Market Fund Premium Class (FZEXX)||0.37%||$25,000|
Income from these funds is tax-exempt from the federal income tax but only a small percentage is exempt from state income tax. The yield is lower than the yield on the seven taxable money market funds but the federal income tax exemption makes up for it when you’re in a high tax bracket. If you live in California, Massachusetts, New Jersey, or New York, you can still invest in these national funds if you don’t mind paying more in state income tax.
Remember to claim the small state tax exemption when you do your taxes. See how to do it in State Tax-Exempt Muni Bond Interest from Mutual Funds and ETFs.
Taxable or Tax-Exempt?
A tax-exempt money market fund offers tax savings but it pays less. Choose a tax-exempt fund if you’re in a high tax bracket. Choose a taxable fund if you’re in a low tax bracket. If you’re not sure whether your federal and state tax brackets are considered high or low, you can use a calculator to see which fund offers a better yield after taxes.
A wrinkle in comparing taxable and tax-exempt money market funds is that the yield on tax-exempt money market funds swings wildly throughout the year. This chart shows the yield on a taxable money market fund and the yield on a tax-exempt money market fund over a 12-month period:
While the yield on the taxable fund (green line) rose steadily over time as the Fed raised interest rates, the yield on the tax-exempt fund (orange line) swung wildly up and down. If you happen to compare the after-tax yields when the yield on the tax-exempt fund is near a top, it would show that the tax-exempt fund is better even in a low tax bracket. If you happen to compare them when the yield on the tax-exempt fund is near a bottom, it would show that the taxable fund is better even in a high tax bracket.
So you can’t just adjust for taxes only based on the yields at this moment. You need to look over a longer period to take into account the wild swings in the yield on tax-exempt funds.
User retiringwhen on the Bogleheads forum created a Google Sheet that does this. It’s called MM Optimizer. Although the current version of this tool focuses on Vanguard money market funds, it’s also informative when you use a Fidelity money market fund. If the tool shows that a Vanguard taxable money market fund is better than a Vanguard tax-exempt fund at your tax rates, it’s highly likely that a Fidelity taxable money market fund is also better than a Fidelity tax-exempt fund for you at the same tax rates.
The author of MM Optimizer is considering adding direct support for Fidelity money market funds. It’s possible that a future version of MM Optimizer will include Fidelity money market funds as well.
Your Tax Rates
MM Optimizer is a shared as View Only. After you make a copy of it to your Google account, you change the tax rates on the My Parameters tab to your tax rates.
Compare After-Tax Yield
The My Charts tab shows the after-tax yield of different funds over the last 12 months. You can watch the yields and switch back and forth between a taxable fund and a tax-exempt fund but I wouldn’t bother. The chart shows how many times you would’ve had to switch to catch the temporary swings and how short-lived each switch was.
I would take a look at this chart and see which line is on top most of the time. Choose a Fidelity taxable money market fund and stay with it if the chart shows that the smoother line is on top most of the time. Choose a Fidelity tax-exempt money market fund if the chart shows that the bouncy line is on top most of the time.
When I played with MM Optimizer, it showed that a taxable money market fund was still better for someone in a 35.8% federal income tax bracket (32% plus 3.8% Net Investment Income Tax) and a 9% state income tax bracket. The tax brackets must be higher than those levels for a tax-exempt money market fund to win.
MM Optimizer has a lot more features but you don’t have to get into those. It’s simple to use if you only look at the places I’m showing here. The author is still adding new features. I hope it will include Fidelity money market funds soon. You’ll find the link to the latest version in this post on the Bogleheads forum.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.