Money Market Fund or Account

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msdontplay
Posts: 4
Joined: Wed Jan 09, 2008 8:57 am

Money Market Fund or Account

Post by msdontplay »

I have been trying to decide between a money market fund such as Vanguard Prime Money Market or just stick with the money market account I have with CapitalOne. The money market account right now is paying 4.00 APY, 3.92% interest. I know money market accounts are insured by FDIC up to 100,000 and money market funds are not. My question is for people that have money market funds. Does your principal stay relatively protected or is there a huge fluctuation although it is not backed by FDIC? Can I have a potential chance of earning a higher return with the money market fund by accepting a little risk or would it probably be about the same as the money market account? Is it worth it for most people to pay the expense ratio of .24% instead of having a fee-free money market account is my biggest concern? The interest is credited monthly to my money market account whereas the balance could fluctuate daily in a money market fund if I understand correctly. Can anyone shed any light on this topic?
sport
Posts: 9634
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Money Market Fund or Account

Post by sport »

msdontplay wrote:I have been trying to decide between a money market fund such as Vanguard Prime Money Market or just stick with the money market account I have with CapitalOne. The money market account right now is paying 4.00 APY, 3.92% interest. I know money market accounts are insured by FDIC up to 100,000 and money market funds are not. My question is for people that have money market funds. Does your principal stay relatively protected or is there a huge fluctuation although it is not backed by FDIC? Can I have a potential chance of earning a higher return with the money market fund by accepting a little risk or would it probably be about the same as the money market account? Is it worth it for most people to pay the expense ratio of .24% instead of having a fee-free money market account is my biggest concern? The interest is credited monthly to my money market account whereas the balance could fluctuate daily in a money market fund if I understand correctly. Can anyone shed any light on this topic?
MM funds have a constant $1 per share value. It does not fluctuate at all. However, there is no guarantee that the share value will remain at $1. On a practical basis though, with a good MM fund, this is not a concern, and Vanguards MM funds are excellent.

The quoted yield on MM funds is net of expenses. Therefore, you do not need to take the expense ratio into account when making a decision. The MM accounts are not "fee-free" as you indicate. MM accounts pay whatever the bank wishes to pay. MM funds pay the actual market yield, less the expense ratio.

MM funds also come in a variety of types: Prime, Federal, Treasury, Federal tax exempt, and (for some states) double tax exempt. The choice of type depends mostly on your federal and state income tax situation. Accordingly, even though MM funds may have similar yields to MM accounts, they may be preferred on an after tax basis.

I hope this answers some of your questions.

Best wishes,

Jeff
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

Money Market Fund Information

Post by Laura »

msdontplay,

You might find this article with Money Market Comparisons of help. Also, you are looking for the highest after-tax yield so you may be better off in a lower returning tax exempt fund once you subtract taxes from your bank money market. The Finance Buff Taxable-Equivalent Yield Calculator can help you do this comparison quickly and easily.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
jltree
Posts: 5
Joined: Fri Jan 11, 2008 2:36 am

How to use taxable equivalent calculator results

Post by jltree »

I'm not quite sure how to use the results I get from the taxable equivalent calculator. Here's what I get for my tax bracket:

Fully Taxable: 3.551% after tax, 5.220% tax equivalent
Treasury: 3.720% after tax, 5.469% tax equivalent
Nat'l Tax-Exempt: 3.395% after tax, 4.991% tax equivalent
State Tax-Exempt: 3.610% after tax, 5.307% tax equivalent
AMT Free: 3.410% after tax, 5.013% tax equivalent


How would one use this info to decide between: VMMXX (taxable) which is yielding 4.55%, and VCTXX (CA and Fed tax exempt) which yields 2.94%?

Thanks.
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mudfud
Posts: 1223
Joined: Tue Feb 20, 2007 4:34 pm

Re: How to use taxable equivalent calculator results

Post by mudfud »

jltree wrote:I'm not quite sure how to use the results I get from the taxable equivalent calculator. Here's what I get for my tax bracket:

Fully Taxable: 3.551% after tax, 5.220% tax equivalent
Treasury: 3.720% after tax, 5.469% tax equivalent
Nat'l Tax-Exempt: 3.395% after tax, 4.991% tax equivalent
State Tax-Exempt: 3.610% after tax, 5.307% tax equivalent
AMT Free: 3.410% after tax, 5.013% tax equivalent


How would one use this info to decide between: VMMXX (taxable) which is yielding 4.55%, and VCTXX (CA and Fed tax exempt) which yields 2.94%?

Thanks.
Jltree,

You have to enter the current compound yield for the funds you are interested in, along with your tax bracket information.

Mud
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Joseph4
Posts: 70
Joined: Sun Sep 30, 2007 1:17 pm
Location: Philadelphia

Re: How to use taxable equivalent calculator results

Post by Joseph4 »

jltree wrote:I'm not quite sure how to use the results I get from the taxable equivalent calculator. Here's what I get for my tax bracket:

Fully Taxable: 3.551% after tax, 5.220% tax equivalent
Treasury: 3.720% after tax, 5.469% tax equivalent
Nat'l Tax-Exempt: 3.395% after tax, 4.991% tax equivalent
State Tax-Exempt: 3.610% after tax, 5.307% tax equivalent
AMT Free: 3.410% after tax, 5.013% tax equivalent


How would one use this info to decide between: VMMXX (taxable) which is yielding 4.55%, and VCTXX (CA and Fed tax exempt) which yields 2.94%?

Thanks.
Somebody please correct me if I'm wrong (one day I'll have to worry about this, for now I'm all in Prime :lol: ) but you should just select the fund that provides the highest after-tax yield. In your case that is Treasury. Also don't forget to look at Admiral Treasury if you can meet the minimum.
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tfb
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Re: How to use taxable equivalent calculator results

Post by tfb »

jltree wrote:How would one use this info to decide between: VMMXX (taxable) which is yielding 4.55%, and VCTXX (CA and Fed tax exempt) which yields 2.94%?
I wrote the calculator. You have to overwrite the default values with the current yield numbers from Vanguard. Then you choose the one with highest after-tax yield. See the first link in Laura's post for details.

Update: I removed the default values in the calculator to avoid confusion.
Harry Sit, taking a break from the forums.
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