tax efficient money market funds

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gram
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tax efficient money market funds

Post by gram » Sun Jun 30, 2019 10:57 pm

For those in 24% federal tax bracket living in California paying 9.4% state tax, what are some highest yield post-tax MM funds?
Last edited by gram on Mon Jul 01, 2019 11:41 pm, edited 2 times in total.

RetiredAL
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Re: tax efficient money market funds

Post by RetiredAL » Sun Jun 30, 2019 11:18 pm

gram wrote:
Sun Jun 30, 2019 10:57 pm
For those in 20 to 25% tax bracket living in California, what are some highest yield post-tax MM funds?
Is that 20 to 25% Fed and then CA on top of that, or is it 20 to 25% Fed and CA combined.

I manage by Dad's accounts and his combined rate is 30%. He's right at the tipping point as whether a Ca Muni Fund with their lower yields offer any advantage over a higher yield taxable bond funds.

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gram
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Re: tax efficient money market funds

Post by gram » Mon Jul 01, 2019 12:18 am

Updated the original post with actual tax rates. Thanks.

HomeStretch
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Re: tax efficient money market funds

Post by HomeStretch » Mon Jul 01, 2019 5:42 am

There is currently not a Federal 28% tax bracket. Is your Federal rate 24%?

With a high state tax rate, the Vanguard Treasury Money Market Fund (MMF) VUSXX should have a competitive tax equivalent yield. There is a $50k minimum.

You might check your tax equivalent yields for Vanguard’s National Muni MMF VMSXX or CA Muni MMF VCTXX. $3k minimums.

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travelogue
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Re: tax efficient money market funds

Post by travelogue » Mon Jul 01, 2019 3:57 pm

If you can’t meet the $50k minimum for VUSXX, VMFXX is just under 80% exempt from state taxes.

https://advisors.vanguard.com/iwe/pdf/F ... 012019.pdf

stocknoob4111
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Re: tax efficient money market funds

Post by stocknoob4111 » Mon Jul 01, 2019 4:00 pm

I am in the same brackets, 24% Fed and 9.3% CA state. I found the best to be VMFXX which is just the Vanguard Settlement fund. It has 78% Treasuries so you save that in CA state interest which gives you a combined tax rate of about 26.x%.. not great but better than 33.3

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gram
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Re: tax efficient money market funds

Post by gram » Mon Jul 01, 2019 11:42 pm

HomeStretch wrote:
Mon Jul 01, 2019 5:42 am
There is currently not a Federal 28% tax bracket. Is your Federal rate 24%?

With a high state tax rate, the Vanguard Treasury Money Market Fund (MMF) VUSXX should have a competitive tax equivalent yield. There is a $50k minimum.

You might check your tax equivalent yields for Vanguard’s National Muni MMF VMSXX or CA Muni MMF VCTXX. $3k minimums.
Apologies. Yes, it is 24% for Federal. Updated the original question once again.

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gram
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Re: tax efficient money market funds

Post by gram » Tue Jul 02, 2019 1:07 am

VUSXX: The Fund’s distributions may be taxable as ordinary income or capital gain. Where does it say it is tax exempt federal or state?

I just looked at VCITX out of curiosity which is both federal and state tax exempt.

cacophony
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Re: tax efficient money market funds

Post by cacophony » Tue Jul 02, 2019 2:37 am

gram wrote:
Tue Jul 02, 2019 1:07 am
VUSXX: The Fund’s distributions may be taxable as ordinary income or capital gain. Where does it say it is tax exempt federal or state?

I just looked at VCITX out of curiosity which is both federal and state tax exempt.
Treasury securities are taxed at the federal level, but not the state. VUSXX is 100% treasuries, therefore you'd pay a total of 24% tax on the earnings.

VCITX is entirely tax free (both federal and state) but that's a long term bond fund so the small amount of extra earnings requires a lot more risk.

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gram
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Re: tax efficient money market funds

Post by gram » Tue Jul 02, 2019 1:12 pm

There is a list of tax exempt funds maintained here: https://investor.vanguard.com/mutual-fu ... nd-returns

How would one figure out whether exempt from federal or state?
Fund prospectus is also not very clear for some these funds.

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Re: tax efficient money market funds

Post by grabiner » Tue Jul 02, 2019 8:25 pm

gram wrote:
Tue Jul 02, 2019 1:12 pm
There is a list of tax exempt funds maintained here: https://investor.vanguard.com/mutual-fu ... nd-returns

How would one figure out whether exempt from federal or state?
Fund prospectus is also not very clear for some these funds.
Fund-specific tax information on Vanguard's site gives a link to the fund-specific information (how much each fund holds in Treasuries, and whether the Treasury portion is exempt), and the state-specific information (how much each fund holds in each state).

You also need to check your state tax laws; some states exempt all munis from taxation, most exempt the fraction from their own state, and some give no state tax exemption unless at least 50% of the fund is exempt from state tax.
Wiki David Grabiner

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gram
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Re: tax efficient money market funds

Post by gram » Wed Jul 03, 2019 12:10 am

Definitely a sophistication is required to some level to perform that level of tax efficiency analysis.

Also puzzled why would people recommend funds that are state exempt only for California residents when it makes sense to have at least the federal exemption given the 24% tax bracket vs state 9.4% in our use case here.

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Re: tax efficient money market funds

Post by cacophony » Wed Jul 03, 2019 12:44 am

gram wrote:
Wed Jul 03, 2019 12:10 am
Definitely a sophistication is required to some level to perform that level of tax efficiency analysis.

Also puzzled why would people recommend funds that are state exempt only for California residents when it makes sense to have at least the federal exemption given the 24% tax bracket vs state 9.4% in our use case here.
As an example, the Vanguard California Muni Money Market fund currently yields 1.5%. It's not subject to any taxes (fed or state) for California residents, so your actual return would be 1.5%. But the Vanguard Treasury Money Market currently yields 2.29%. It's subject to federal taxes so the final return would be 1.74%. Last I checked 1.74% was more than 1.5% :wink:

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gram
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Re: tax efficient money market funds

Post by gram » Wed Jul 03, 2019 1:53 am

cacophony wrote:
Wed Jul 03, 2019 12:44 am
gram wrote:
Wed Jul 03, 2019 12:10 am
Definitely a sophistication is required to some level to perform that level of tax efficiency analysis.

Also puzzled why would people recommend funds that are state exempt only for California residents when it makes sense to have at least the federal exemption given the 24% tax bracket vs state 9.4% in our use case here.
As an example, the Vanguard California Muni Money Market fund currently yields 1.5%. It's not subject to any taxes (fed or state) for California residents, so your actual return would be 1.5%. But the Vanguard Treasury Money Market currently yields 2.29%. It's subject to federal taxes so the final return would be 1.74%. Last I checked 1.74% was more than 1.5% :wink:
If Vanguard Treasury Money Market were to be federal exempt instead of state, after-tax returns would have been higher than 1.74%. That was my point assuming such MM funds exist.

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Re: tax efficient money market funds

Post by cacophony » Wed Jul 03, 2019 1:58 am

gram wrote:
Wed Jul 03, 2019 1:53 am
cacophony wrote:
Wed Jul 03, 2019 12:44 am
gram wrote:
Wed Jul 03, 2019 12:10 am
Definitely a sophistication is required to some level to perform that level of tax efficiency analysis.

Also puzzled why would people recommend funds that are state exempt only for California residents when it makes sense to have at least the federal exemption given the 24% tax bracket vs state 9.4% in our use case here.
As an example, the Vanguard California Muni Money Market fund currently yields 1.5%. It's not subject to any taxes (fed or state) for California residents, so your actual return would be 1.5%. But the Vanguard Treasury Money Market currently yields 2.29%. It's subject to federal taxes so the final return would be 1.74%. Last I checked 1.74% was more than 1.5% :wink:
If Vanguard Treasury Money Market were to be federal exempt instead of state, after-tax returns would have been higher than 1.74%. That was my point assuming such MM funds exist.
Yes that would be better but sadly it doesn't exist.

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gram
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Re: tax efficient money market funds

Post by gram » Thu Jul 11, 2019 10:59 pm

travelogue wrote:
Mon Jul 01, 2019 3:57 pm
If you can’t meet the $50k minimum for VUSXX, VMFXX is just under 80% exempt from state taxes.

https://advisors.vanguard.com/iwe/pdf/F ... 012019.pdf
But VUSXX is not listed under Tax exempt funds here(?) https://investor.vanguard.com/mutual-fu ... nd-returns

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Re: tax efficient money market funds

Post by bluquark » Thu Jul 11, 2019 11:26 pm

gram wrote:
Thu Jul 11, 2019 10:59 pm
travelogue wrote:
Mon Jul 01, 2019 3:57 pm
If you can’t meet the $50k minimum for VUSXX, VMFXX is just under 80% exempt from state taxes.

https://advisors.vanguard.com/iwe/pdf/F ... 012019.pdf
But VUSXX is not listed under Tax exempt funds here(?) https://investor.vanguard.com/mutual-fu ... nd-returns
That category refers to federally tax-exempt funds. State-tax-exempt-only funds are not categorized this way by Vanguard because the tax benefit is negligible for the majority of investors.

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gram
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Re: tax efficient money market funds

Post by gram » Fri Jul 12, 2019 12:09 am

It is still confusing how would one pick MM fund(s) offering highest after tax return for a California resident in 24% tax bracket.

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Cyclesafe
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Re: tax efficient money market funds

Post by Cyclesafe » Fri Jul 12, 2019 9:21 am

OP, the info is somewhere above.

For a 24% federal marginal taxpayer (with taxable income less than the trigger for NIIT - 2018 MFJ $250k) and 9.3% California marginal rate, as of 7/11/19, total after tax returns for the following funds are as follows:

VMMXX: 2.30%*(1-.24-.093) = 1.53%
VMFXX: 2.29%*(1-.24-0) = 1.74%
VCTXX: 1.08%*(1-0-0) = 1.08%

Clearly a California taxpayer in this situation would prefer VMFXX.
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retiringwhen
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Re: tax efficient money market funds

Post by retiringwhen » Fri Jul 12, 2019 10:07 am

gram wrote:
Sun Jun 30, 2019 10:57 pm
For those in 24% federal tax bracket living in California paying 9.4% state tax, what are some highest yield post-tax MM funds?
I know you have been trying to your tax rate right, but with a 9.4% CA rate, you have to be sure you are not subject to the 3.8% NIIT for investment income (and money markets count). You could actually be in the 27.8% bracket .....

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gram
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Re: tax efficient money market funds

Post by gram » Fri Jul 12, 2019 8:38 pm

Cyclesafe wrote:
Fri Jul 12, 2019 9:21 am
OP, the info is somewhere above.

For a 24% federal marginal taxpayer (with taxable income less than the trigger for NIIT - 2018 MFJ $250k) and 9.3% California marginal rate, as of 7/11/19, total after tax returns for the following funds are as follows:

VMMXX: 2.30%*(1-.24-.093) = 1.53%
VMFXX: 2.29%*(1-.24-0) = 1.74%
VCTXX: 1.08%*(1-0-0) = 1.08%

Clearly a California taxpayer in this situation would prefer VMFXX.
Appreciate the recap of data points.

Confusion still remains which I am not expecting anyone to address further!
1. One would expect such tax efficient fund(s) with higher after tax returns exist under this tax exempt fund list but not true: https://investor.vanguard.com/mutual-fu ... nd-returns
2. Not sure where it is stated clearly that VMFXX is state tax exempt.
3. I was expecting VUSXX being admiral shares with low fees would fare better but not.
4. Bottomline to me: There seems no clear data to pick such tax efficient funds. Although consensus on this thread is VMFXX. What if some other fund we missed(?).
Last edited by gram on Sat Jul 13, 2019 12:30 am, edited 1 time in total.

HomeStretch
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Re: tax efficient money market funds

Post by HomeStretch » Fri Jul 12, 2019 9:31 pm

gram wrote:
Fri Jul 12, 2019 8:38 pm
2. Not sure where it is stated clearly that VMFXX is federal tax exempt.
VMFXX is not federal tax exempt. It is (at least in my state) partially state tax exempt.

Vanguard publishes a “US Government Obligations Worksheet” each December in the tax information center. See 2018 worksheet link below. Per that sheet, 77.79% of VMFXX’s income was from US government obligations therefore 77.79% of my 2018 dividends were state tax exempt.

https://personal.vanguard.com/pdf/USGO_012019.pdf

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gram
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Re: tax efficient money market funds

Post by gram » Sat Jul 13, 2019 12:31 am

My apologies. I corrected stating VMFXX is state tax exempt in the original message above.

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Re: tax efficient money market funds

Post by Cyclesafe » Sat Jul 13, 2019 9:50 am

gram wrote:
Fri Jul 12, 2019 8:38 pm
2. Not sure where it is stated clearly that VMFXX is state tax exempt.
https://personal.vanguard.com/pdf/USGO_022018.pdf

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