This post was written in 2007. Things have changed since then. Please read the update Which Vanguard Money Market Fund Is the Best at Your Tax Rates.
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Cents You Asked says
Great post! I wish I had read this before setting up my Vanguard Prime MM. I’m going after the same simplification idea that you are and so far I love it all being in one place. Best of luck!
Anonymous says
tfb,
Your work here, and your posts on the Diehards forum, are very helpful and much appreciated. Thanks!
Shadox says
This is a superb post! I have posted a link to it on my blog.
You are now on my list of favorite PF bloggers.
FIRE Finance says
This is a fine post, we have cited it as one of our favorites in our weekly
carnival round up. Keep up the great work.
Cheers,
FIRE Finance
Anonymous says
the calculator is offline today 🙁
I just realized that money market funds give off dividends which are taxed at a significantly lower rate than regular income. I dont remember if you took that into consideration in your calculator…
thanks, theo
Anonymous says
calculator back online. hosting site was down for a while…
i also realized that although MMF distributions are called dividends, they are taxed at your marginal tax rate (i guess they are not qualified dividends?).
oh well…
Anonymous says
I don’t think you are right about VMPXX and VUSXX being non taxable at state level. It is true that a greater portion of the fund assets are invested in Tresury securities but that does not mean they will be exempted from state taxes. I just read the fund pages on Vangurad. For other securities they specificly say that this fund is not taxable at federal level (example vanguard tax exempt money market fund). Would you comment and clarify this please? In my case your calculator gives me Tresury as the best option if it was state tax exempt but before I take steps I would like to understand it better
Harry Sit says
@anonymous re: state tax exempt status for Vanguard Treasury Money Market Fund (VMPXX) and Vanguard Admiral Treasury Money Market Fund (VUSXX).
1) Treasury bonds are exempt from state and local income tax. That’s the law. See 31 USC 3124(a).
2) VMPXX and VUSXX invests nearly 100% in Treasury bills and Treasury notes. See latest semi-annual reports for VMPXX and VUSXX.
Anonymous says
I know VMPXX and VUSXX invest nearly 100% in treasury. I also know treasuries are exempt from income tax. But the word nearly is important in my opinion. I would probably call Vangurad to find out for sure. However, one question I would raise, Why they would list VMPXX and VUSXX in the Taxable money market instead of listing them with Tax exempt nature. For example they have listed short term munis in the short term tax exempt section. If you look at the holdings, you will find out the only differece between 3 different kind of money market is the spread in the credit quality of the issuers. So what I think is you can invest in any of three types of taxable MMF but you have to pay in terms of yield to get to NEARLY pure top rated credit quality AAA.
Harry Sit says
Did you follow the links I gave in (2) in my previous comment? They showed VMPXX was 100% in Treasury, VUSXX 99.8% in Treasury. The taxable versus tax-exempt label in Vanguard means taxable or tax exempt at the federal level.
Ari says
Great post and great site. Thanks for the FiLife nod.
One thing I recently came across: Tax-exempt yield isn’t always what it seems. The Alpine Municipal MMF, with a yield of 3.93% (10/4) derives almost 67% of income from securities subject to AMT.
Seems rather counterintuitive given the expanding reach of the AMT.
Anonymous says
hello TFB,
looking for some advice,
im debating on the vanguard Prime MMA or the NY tax exempt. which would you think is better for me?
im 24, filing single. thanks ~
Harry Sit says
What does the calculator say? This post and the calculator were made to help you compare yield between two funds. Choose whichever fund offers the higher after tax yield to you.
Anonymous says
tfb,
Thanks again for this post. I used it a year ago to make some decisions on where I was keeping my MM funds. Now it’s a year later and MM rates have dropped like a stone. I’m glad I made the moves I did – especially after recently filling out my tax paperwork.
-John
Nate says
I’m considering I-bonds, which currently offer 2.42% yield which is exempt from state taxes.
In the calculator above should I put the yield in “State-Specific Tax Exempt”?
Harry Sit says
Nate – I-Bonds are most similar to Treasurys.
Cate says
I spent almost a week trying to get our money out of Vanguard. We had the account for over 20 years. I would never – no never trust this company AGAIN. If you use them rest assured you do so just as if they were a brokerage house – consider it money you can well afford to lose. Otherwise, don’t invest with them. It took the
threat of a Court Order to force them to release the money; meanwhile telling them that I know where the press room in the courthouse is so that the associated press would be sure to get word of what they were doing to us. The only other company that acts like this is Merrill Lynch.
zanon says
TFB: Would you still recommend the CA fund given California’s economic situation? They will probably be bailed out by the Fed, but still, if there’s any state on the verge of default it’s CA.
Harry Sit says
zanon – I don’t think I ever recommended any fund. The purpose of this post was to provide a tool to compare the bottom-line yield. My thoughts on risk are in this follow-up post: Risks in Money Market Funds.
zanon says
Sorry TFB — you are right, there was no recommendation.
Thanks for the follow-up link.
Love the site!
Samples says
How much does the historical yield (which is what we’re calculating from) correlate to an expected future yield for these funds? Obviously nobody knows the exact answer, but do they tend to move up and down in a similar ratio that would leave one to believe the better fund for you now based on the calculator will be the better fund for you tomorrow?
Harry Sit says
Samples – They tend to move up and down in the same direction but not in a similar ratio. The best today can be 2nd best a few months from now. If the difference isn’t large, it’s worth switching. If there is substantial difference, then I switch. There is no cost for switching. So I just redo the calculation with the current rates once in a few months.
Amit Mehta says
Great Post! You are doing a fantastic service to all of us.
Jim says
I’m in the 25% marginal bracket, but my effective tax rate is 11%. Would using your effective rate be more accurate?
Harry Sit says
Jim – You should use the marginal bracket because any money you earn from these investments is on top of other money you already earn.
anon says
What do you think about exposure to the Euro Bank money being talked about this week? Seems like they have more risk than traditional…
Harry Sit says
@anon – It doesn’t matter. Yield on money market funds is so low these days that you shouldn’t have much money there anyway. Just put the money in a FDIC insured savings account. If you are worried about European banks having widespread defaults on short-term debt, worry about your stocks, not your money market fund. In that scenario I’m sure you will lose a lot more from your stocks.
sarabayo says
In recent years, the percentage of VMFXX’s holdings that are US government obligations has risen substantially. In 2018, Vanguard reported it as 79.51%: https://personal.vanguard.com/pdf/USGO_012019.pdf
If I’m not mistaken, since more than 50% of VMFXX’s holdings are US government obligations, that means that income from VMFXX is eligible for partial exemption from California state tax, contrary to what is written in this article. In particular, by the 2018 numbers, it’s 77.79% CA tax exempt (i.e. CA taxes 22.21% of income from VMFXX).
I’m not sure about how this changes the situation with Connecticut or New York, if at all.
By the way, I think that VMFXX has become much more familiar to Vanguard clients than it used to be back in 2007 when this article was originally written. Because of the money market fund reforms put into place during the aftermath of the 2008 financial crisis, VMFXX is now the default (and indeed the only) settlement fund for Vanguard brokerage accounts. Maybe it is worth mentioning this in the article?