Question about Vanguard money market funds

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mike_in_texas
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Joined: Sun Oct 07, 2007 3:38 pm

Question about Vanguard money market funds

Post by mike_in_texas »

I live in Texas, which has no state income tax. I'm trying to distinguish between the Vanguard Federal Money Mkt Fund and the Vanguard Prime Money Mkt Fund in terms of taxation as it applies to me.

The Prime Money Market Fund has a slightly higher return, but incurs both federal and state income tax (the latter of which doesn't apply to me). However, I can't seem to find any info on how the Federal Money Market is taxed.

This honestly isn't a huge issue, just something that's bugging me more than anything.
xenial
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Post by xenial »

mike_in_texas wrote:I live in Texas, which has no state income tax. I'm trying to distinguish between the Vanguard Federal Money Mkt Fund and the Vanguard Prime Money Mkt Fund in terms of taxation as it applies to me.
There's no difference. As a matter of fact, if you pay only federal income taxes, even the Treasury Money Market Fund offers you no advantage.
mike_in_texas wrote:The Prime Money Market Fund has a slightly higher return, but incurs both federal and state income tax (the latter of which doesn't apply to me). However, I can't seem to find any info on how the Federal Money Market is taxed.
Not that it really affects you, but in 2006 4.67% of Prime Money Market's income was exempt from state & local taxes (in most states), while 22.06% of Federal Money Market's income was exempt. Here's a reference: U.S. Government Obligations Information

Best wishes,
Ken
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mickeyd
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Post by mickeyd »

Hey Mike,


I'm trying to distinguish between the Vanguard Federal Money Mkt Fund and the Vanguard Prime Money Mkt
I live in TX also and have been very satisfied with the PMMF for many years. It consistently has a higher return than the FMMF. That's enough for me. 8)
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
sport
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Post by sport »

Mike,

If you are not subject to state income taxes, the Prime, Federal, and Treasury MM funds are all taxed the same. There is another possible concern, however. The Prime MM fund is very very safe. The Federal fund is even safer, and the Treasury fund is the safest of the three. The difference in safety does not bother most people because it is small. However, if you are concerned about the safety of high-grade short-term corporate notes, such as bank CD's, then the Federal or Treasury fund would be more to your liking. Of course, the higher levels of safety come with lower yields.

Best wishes,
Jeff
Topic Author
mike_in_texas
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Joined: Sun Oct 07, 2007 3:38 pm

Post by mike_in_texas »

Thanks for all the replies! Armed with the information posted on this thread thus far, I have a follow-up question. I currently have several thousand dollars in the Federal money market. It's yield is very close (but lower relative) to the Prime MM fund.

Given Ken's comment above about taxable holdings with these MMs, does the Federal MM actually make better sense to hold my taxable account? I hope that question makes sense.
sport
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Post by sport »

Mike,
You need to hold your taxable cash someplace. A MM fund is good for short term savings, or an emergency fund. If your tax bracket is high enough, Vanguard has tax exempt MM funds as well. My rule of thumb is that for tax brackets 25% or less, the taxable funds are best. If your bracket is higher, take a look at the tax exempt fund which invests in municple obligations. If you wish, you can look up the current yields and calculate which fund gives you the best return for your tax bracket. Small differences should be ignored, because the advantage can change back and forth.

Best wishes,
Jeff
xenial
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Post by xenial »

mike_in_texas wrote:Given Ken's comment above about taxable holdings with these MMs, does the Federal MM actually make better sense to hold my taxable account? I hope that question makes sense.
It doesn't matter much. There's no difference in taxation for you. The Federal Money Market Fund has a very tiny safety advantage.

Best wishes,
Ken
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RustyShackleford
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Post by RustyShackleford »

This may sound crazy (for two reasons), but I hold money
in both Prime and Federal, as a book-keeping convenience.
The Prime is my main cash account. Federal is for stoozing
(farming interest off zero-interest balance-transfer loans off
credit cards).
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market timer
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Post by market timer »

RustyShackleford wrote:This may sound crazy (for two reasons), but I hold money
in both Prime and Federal, as a book-keeping convenience.
The Prime is my main cash account. Federal is for stoozing
(farming interest off zero-interest balance-transfer loans off
credit cards).
Have you considered opening a business high yield savings account? I was wondering if you could file a schedule C business for credit "farming," (haha, I like this description). A business account would help legitimize this, plus it separates your accounts as you desire. Then you could deduct BT fees, interest, and other miscellaneous expenses from Rusty's Credit Farm.
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