VUSXX interest question

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CarolinaDoc
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Joined: Sun Feb 28, 2016 8:34 am

VUSXX interest question

Post by CarolinaDoc »

I am debating transferring my savings account to VUSXX fund. For those that use this fund, how is the interest paid and taxed? Is it a qualified dividend? Or is it Interest? What if I Set the account to DRIP and am buying shares for $1 and will be selling them for $1 and thus have $0 capital gains? Please provide some insight. Thank you.
retiringwhen
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Re: VUSXX interest question

Post by retiringwhen »

CarolinaDoc wrote: Wed Mar 27, 2019 4:20 pm I am debating transferring my savings account to VUSXX fund. For those that use this fund, how is the interest paid and taxed? Is it a qualified dividend? Or is it Interest? What if I Set the account to DRIP and am buying shares for $1 and will be selling them for $1 and thus have $0 capital gains? Please provide some insight. Thank you.
It is regular (non-qualified) dividend, not materially different than "interest".

The dividends are accrued daily and paid monthly (with daily accruals distributed if you sell shares during the month).

As with any Mutual Fund Money Market, the shares are pegged at $1 but in theory could break the buck, but due the gates and procedures in place, this fund is designed to avoid that possibility up to and including in very extreme cases, delaying redemptions. Read the prospectus for more details, then compare it with other Money Market Mutual funds such as Prime (VMMXX). TLDR, no capital gains/losses.

I hold 50% of my emergency funds in this account.

BTW, since the fund is 100% Federal Government Debt instruments, the income is State Income Tax Free.
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CarolinaDoc
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Re: VUSXX interest question

Post by CarolinaDoc »

Thanks so much for the information. Much appreciated.
aspiringboglehead
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Re: VUSXX interest question

Post by aspiringboglehead »

retiringwhen wrote: Wed Mar 27, 2019 4:48 pm As with any Mutual Fund Money Market, the shares are pegged at $1 but in theory could break the buck, but due the gates and procedures in place, this fund is designed to avoid that possibility up to and including in very extreme cases, delaying redemptions.
Just to clarify, VUSXX is a government money-market fund, not a retail fund, so it is not required to have (and does not currently have) redemption gates.

The main reason to think that the price of VUSXX won't fall below $1.00 is that the holdings are all in Treasury bills, which are short-term obligations of the US government. It is still conceptually possible (in, for example, a hyperinflationary environment) for redemptions to lead this fund to fall below $1.00 (by forcing the fund to sell its holdings before maturity while their prices are depressed), but that is extraordinarily unlikely.
retiringwhen
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Re: VUSXX interest question

Post by retiringwhen »

aspiringboglehead wrote: Wed Mar 27, 2019 6:54 pm
retiringwhen wrote: Wed Mar 27, 2019 4:48 pm As with any Mutual Fund Money Market, the shares are pegged at $1 but in theory could break the buck, but due the gates and procedures in place, this fund is designed to avoid that possibility up to and including in very extreme cases, delaying redemptions.
Just to clarify, VUSXX is a government money-market fund, not a retail fund, so it is not required to have (and does not currently have) redemption gates.

The main reason to think that the price of VUSXX won't fall below $1.00 is that the holdings are all in Treasury bills, which are short-term obligations of the US government. It is still conceptually possible (in, for example, a hyperinflationary environment) for redemptions to lead this fund to fall below $1.00 (by forcing the fund to sell its holdings before maturity while their prices are depressed), but that is extraordinarily unlikely.
Thanks, you are right, I always have it backwards in my head, the Gov't funds (VUSXX and VMFXX) don't have gates, but Prime does since a lot of the instruments are CDs, corporate debt, Munis, Federal debt, etc. The only funds that had an issue in the Financial Crisis were the non-Gov't funds (and Vanguard's funds made it through safely as did 99% of all the other funds).
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grabiner
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Re: VUSXX interest question

Post by grabiner »

Note that while the IRS will tax the dividends from this account as ordinary dividends, your state (presumably NC or SC given your handle) will not tax them; interest on Treasury bonds is exempt from state tax.
Wiki David Grabiner
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