Tax benefits VMFXX vs VUSXX for CA residents

[carbonfiber248]

I was recently recommended to consider VUSXX. Reading up on the differences I understand in a state like CA if there is over 50% in USGO it is tax exempt.


I could not use the MM Optimizer excel sheet unfortunately so I'm trying to better understand how this fund is better if we take into account 2024 and historical data.

Assume CA tax rate of 10% to keep it simple
Assume 1,000,000 in cash in either VMFXX vs VUSXX

Should a person in this scenario switch over to VUSXX in 2025?

Thanks

[retired@50]

Assume CA tax rate of 10% to keep it simple
Assume 1,000,000 in cash in either VMFXX vs VUSXX

Should a person in this scenario switch over to VUSXX in 2025?

Yes, switch to VUSXX.
The interest earned by VUSXX will be mostly from US Treasury products (somewhere between 80% - 99%) which are USGO instruments. So, if you earn $100 in VUSXX interest CA can only tax the portion that is NOT USGO.

When you're filling out your income taxes using tax software (like Turbo Tax or others) you can stipulate that a portion of the interest you earned from VUSXX is from USGO. There will be some adjustments you'll need to make on the CA state return, but it's all pretty do-able if you're at all familiar with doing your own income taxes. Otherwise, tell your tax preparer about the situation and they should be able to help.

Vanguard publishes a document each January that details the portion of interest earned that was derived from USGO. Once you have that number you can do the necessary math to fill out your tax forms.

Regards,

[carbonfiber248]

Thanks for the tip, any reason not to switch to VUSXX. I was reading some posts on here where people switched back to VMFXX due to the higher yield and Repos for FY23, granted these are older threads.

I do my own taxes in Turbo tax. I saw this post on the turbotax forum and it sounds like Vanguard will provide the % which is taxed on the 1099-DIV/INT form they provide. Not having experience with tax deffered accounts I was concerned about doing the calculation myself https://ttlc.intuit.com/community/taxes ... 00/3154483

Are you stating this calculation has to be done manually?

I'm looking for any drawbacks of switching to VUSXX.

I realize VMFXX is a settlement fund so it has a checking option and it has a direct deposit option. VUSXX does not.

[retired@50]

Thanks for the tip, any reason not to switch to VUSXX. I was reading some posts on here where people switched back to VMFXX due to the higher yield and Repos for FY23, granted these are older threads.

I do my own taxes in Turbo tax. I saw this post on the turbotax forum and it sounds like Vanguard will provide the % which is taxed on the 1099-DIV/INT form they provide. Not having experience with tax deffered accounts I was concerned about doing the calculation myself https://ttlc.intuit.com/community/taxes ... 00/3154483

Are you stating this calculation has to be done manually? <- Yes.

I'm looking for any drawbacks of switching to VUSXX.

I realize VMFXX is a settlement fund so it has a checking option and it has a direct deposit option. VUSXX does not.

Yes, the calculation is done manually. It doesn't apply in a tax-deferred account, only in a taxable account.

Suppose you earned $1,000 in interest in 2023 from VUSXX. Since 80% of that money was from USGO you'd simply multiply the $1,000 by the decimal equivalent of 80% which is 0.8 which would mean that $800 of the $1,000 earned is exempt from CA state income taxes.

To tell Turbo Tax about this particular situation you'd check the box or radio button near the question mentioned in that Turbo Tax help page...
Should I mark "A portion of these dividends is U.S. Government interest."? <- Yes.

Since the two funds (VMFXX and VUSXX) offer about the same rate of interest, using VUSXX in a high income tax state like CA makes the most sense if you're seeking to actually keep as much of the interest earned as possible.

If you want to try to use your Vanguard money market fund as a checking account, that's up to you. Since I don't do that, I don't have any advice to offer with regard to check writing. I just use my regular checking account at my local credit union.

Regards,

[mercutio2]

People in similar tax brackets in CA often buy VCADX, to avoid both federal and CA income tax.

Didn't work out well for me in 2022, but on a 5-10 year time horizon, its after tax returns have been better than VUSXX or VMFXX.

[carbonfiber248]

Thanks for the tip, any reason not to switch to VUSXX. I was reading some posts on here where people switched back to VMFXX due to the higher yield and Repos for FY23, granted these are older threads.

I do my own taxes in Turbo tax. I saw this post on the turbotax forum and it sounds like Vanguard will provide the % which is taxed on the 1099-DIV/INT form they provide. Not having experience with tax deffered accounts I was concerned about doing the calculation myself https://ttlc.intuit.com/community/taxes ... 00/3154483

Are you stating this calculation has to be done manually? <- Yes.

I'm looking for any drawbacks of switching to VUSXX.

I realize VMFXX is a settlement fund so it has a checking option and it has a direct deposit option. VUSXX does not.

Yes, the calculation is done manually. It doesn't apply in a tax-deferred account, only in a taxable account.

Suppose you earned $1,000 in interest in 2023 from VUSXX. Since 80% of that money was from USGO you'd simply multiply the $1,000 by the decimal equivalent of 80% which is 0.8 which would mean that $800 of the $1,000 earned is exempt from CA state income taxes.

To tell Turbo Tax about this particular situation you'd check the box or radio button near the question mentioned in that Turbo Tax help page...
Should I mark "A portion of these dividends is U.S. Government interest."? <- Yes.

Since the two funds (VMFXX and VUSXX) offer about the same rate of interest, using VUSXX in a high income tax state like CA makes the most sense if you're seeking to actually keep as much of the interest earned as possible.

If you want to try to use your Vanguard money market fund as a checking account, that's up to you. Since I don't do that, I don't have any advice to offer with regard to check writing. I just use my regular checking account at my local credit union.

Regards,

Thanks for the information, where does vanguard publish this information on the 80%. Do you have a link for say 2024 so I can use that information to better understand where this info is located. I was under the assumption based on that post it would be in the 1099-DIV but it sounds like it is not.

Also any reason not to use VUSXX over VMFXX if you are in a state like California? Any drawbacks or concerns?

[carbonfiber248]

People in similar tax brackets in CA often buy VCADX, to avoid both federal and CA income tax.

Didn't work out well for me in 2022, but on a 5-10 year time horizon, its after tax returns have been better than VUSXX or VMFXX.

VCADX has a little more risk invovled just looking at the rating and it doesn't cover federal exemption with a much lower yield. But an option so thanks for mentioning it.

What are you thoughts on VUSXX and risk compared to VMFXX and reasons not to switch?

[retired@50]

Thanks for the information, where does vanguard publish this information on the 80%. Do you have a link for say 2024 so I can use that information to better understand where this info is located. I was under the assumption based on that post it would be in the 1099-DIV but it sounds like it is not.

Also any reason not to use VUSXX over VMFXX if you are in a state like California? Any drawbacks or concerns?

Vanguard publishes a document each January or February for the prior year on their website. It's probably not out yet for 2024, maybe it'll show up in the next 6 weeks or so.
Start here: https://investor.vanguard.com/investor- ... tion/taxes

If you're looking to maximize your after tax return on your cash holdings, then I can't think of a reason why a CA resident would prefer VMFXX to VUSXX, especially a CA resident in a high tax bracket. VUSXX is a solid choice.

Regards,

[carbonfiber248]

Thanks for the information, where does vanguard publish this information on the 80%. Do you have a link for say 2024 so I can use that information to better understand where this info is located. I was under the assumption based on that post it would be in the 1099-DIV but it sounds like it is not.

Also any reason not to use VUSXX over VMFXX if you are in a state like California? Any drawbacks or concerns?

Vanguard publishes a document each January or February for the prior year on their website. It's probably not out yet for 2024, maybe it'll show up in the next 6 weeks or so.
Start here: https://investor.vanguard.com/investor- ... tion/taxes

If you're looking to maximize your after tax return on your cash holdings, then I can't think of a reason why a CA resident would prefer VMFXX to VUSXX, especially a CA resident in a high tax bracket. VUSXX is a solid choice.

Regards,

Thanks, i just want to do my due dilligence before moving any funds over.

Any chance you can show me where the 2023 breakout might be.

I found this for 2024 off the link you provided but it does not breakout the percentages: https://www.vanguard.com/pdf/PIDIVDAT_2024.pdf

I want to know exactly where to navigate to for this document.

Thanks

[retired@50]

Any chance you can show me where the 2023 breakout might be.

It's under the additional resources - prior year tax data archive.

https://investor.vanguard.com/content/d ... n-2024.pdf

Regards,

[carbonfiber248]

Fantastic thank you

[Artsdoctor]

For convenience, nothing beats Federal Money Market since it's your settlement fund. You can't use VUSXX or VCTXX (the CA money market fund) as your settlement fund.

So you're going to inevitably use VMFXX but it's just a matter of how much you want to keep in it. If you're looking to house a lot of money, then do your own math between VUSXX and VCTXX. Be aware that the USGO of VUSXX can vacillate but you should easily exceed the 50% minimum that the state requires, and you'll probably be in the 90+% each year--but there will be exceptional years. The yield slopes up and down tend to be soft.

Take a look at VCTXX if you're going to hold a lot of cash and if your income is on the higher end. You may do better after taxes, and you may do better if you're well into the IRMAA tiers. The yield changes will not be soft but tooth-edged; this means that what you see today may be a bit different than next week (up one week and down the next) so it's hard to make accurate comparisons. Consider comparing long-term changes in total yield: compare 2024 return of VUSXX with VCTXX.

VACDX is not an appropriate place to hold cash you'll need in the near term. It's an intermediate-term bond fund and you can (and will) lose money when interest rates increase.

[carbonfiber248]

For convenience, nothing beats Federal Money Market since it's your settlement fund. You can't use VUSXX or VCTXX (the CA money market fund) as your settlement fund.

So you're going to inevitably use VMFXX but it's just a matter of how much you want to keep in it. If you're looking to house a lot of money, then do your own math between VUSXX and VCTXX. Be aware that the USGO of VUSXX can vacillate but you should easily exceed the 50% minimum that the state requires, and you'll probably be in the 90+% each year--but there will be exceptional years. The yield slopes up and down tend to be soft.

Take a look at VCTXX if you're going to hold a lot of cash and if your income is on the higher end. You may do better after taxes, and you may do better if you're well into the IRMAA tiers. The yield changes will not be soft but tooth-edged; this means that what you see today may be a bit different than next week (up one week and down the next) so it's hard to make accurate comparisons. Consider comparing long-term changes in total yield: compare 2024 return of VUSXX with VCTXX.

VACDX is not an appropriate place to hold cash you'll need in the near term. It's an intermediate-term bond fund and you can (and will) lose money when interest rates increase.

Thanks for the feedback good information.

Agree on the settlement fund issue. I believe you can setup automated transfers so if you DD into the settlement it can move it to the other accounts possibly.

The CA tax break seems very attractive on VUSXX, i'm surprised more people are not jumping on it given the yields closly follow VMFXX.

I looked at VCTXX and the yields were just much lower to offset any savings.

I don't believe there is any fund that is both State and Fed exempt with a similar 4+% yield right now with the same type of risk otherwise I'm sure people would be jumping on it.

[Artsdoctor]

^ There is usually a pretty lively discussion regarding VUSXX. However, there are probably two reasons why you're not seeing many right now. In 2023, there was a higher percentage of repo's in the fund so the % of VUSXX exempt was lower than many expected. At the same time, rates were increasing quite a bit and people found that it was quite easy to simply buy T-bills at auction directly: which ultimately meant that interest was 100% guaranteed tax-exempt without any fuss. Now, rates are trending down so there is still a bit of an advantage in buying T-bills directly since you're getting a guaranteed yield (say, for 6 months), whereas the money market fund yield will most likely drop a bit quicker depending on how quickly the Fed lowers rates.

But overall, VUSXX has been a perennial favorite for people living in states with higher taxes on income.

You're right that VCTXX can appear much lower and not worthwhile unless you're in a higher marginal tax rate. It's just that on any given day, the SEC yield can vary quite a bit: 2.35% for a few days, then 2.75% for a few days, which is that saw-tooth pattern I mentioned. But unless you're in high federal and state marginal tax rates, it may not be worth it.

[carbonfiber248]

Great explanation. I read about the repos in prior years, that makes sense if people are buying T-bills, i read on another thread in here some were going back to VMFXX but I didn't understand why as the yields between these funds is so similar regardless of the % being exempt. I guess if you are trying to squeeze every bit that would be the reason.

I'm going to move to VUSXX and hold for a while, now that I know where to find the tax information for turbotax i'm smarter today than yesterday thanks to informed people on this site.

[retiringwhen]

I have not seen a real-world marginal tax rate that makes VCTXX beat VUSXX for CA investors since rates got off 0.01% a few years ago.

VUSXX even at 80% USGO beat just about everything most of the time. The only funds that can even come close are GABXX (Gabelli Treasury) and some special high minimum Fidelity funds.

[Artsdoctor]

I have not seen a real-world marginal tax rate that makes VCTXX beat VUSXX for CA investors since rates got off 0.01% a few years ago.

VUSXX even at 80% USGO beat just about everything most of the time. The only funds that can even come close are GABXX (Gabelli Treasury) and some special high minimum Fidelity funds.

The SEC yield of tax-exempt money markets can be tricky to calculate accurately because of the saw-tooth pattern I described: they tend to go up and down every few days. But if you take a look at distribution yields on a monthly basis or on the annual yield for 2024 as another (poor) marker, you can get a different picture. If your marginal federal rate is 40.8% (37% plus 3.8%) and your marginal state rate is over 10%, and you're going to be subjected to IRMAA, you can start to see where VCTXX pays off. All of that said, for most, VUSXX will be a terrific option in people living in high-tax states.

[rkhusky]

Assume CA tax rate of 10% to keep it simple
Assume 1,000,000 in cash in either VMFXX vs VUSXX

For $1M in the fund, 5% return, 10% tax rate, that works out to $5K in taxes.