Vanguard Prime Money Market yield over 2.5%

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Kevin M
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Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 11:34 am

Vanguard Prime Money Market SEC yield now is 2.48%, which is a compound yield of 2.51%. The compound yield is what you'd use to compare to the APY (annual percentage yield) of a bank account, which is why the post title says the yield is over 2.5%.

Although money market funds aren't FDIC insured, I'd be quite comfortable holding my savings in Prime MM instead of a bank savings account with a APY of less than 2.5%.

However, my taxable-equivalent SEC yield (TEY) for Vanguard Treasury MM fund is even higher at 2.61% (2.64% on an APY basis); that's at an SEC yield of 2.32%, and marginal tax rates of 27% fed and 8% state (it's mainly the state tax exemption that boosts the TEY of Treasury MM). And Treasury MM is even safer than Prime MM--I think it's probably about as safe as an FDIC-insured bank account, given that its holdings are 100% Treasury Bills. One downside is that the initial investment is $50K, but once the fund is open, your balance can drop below that and the fund will remain open (I've had less than $1K in the fund at times).

I use Prime MM in Vanguard IRAs and Treasury MM in taxable accounts for my lowest-risk fixed income. Given the flat Treasury yield curve, and the small slope of the CD yield curve, you get little-to-no extra yield for extending maturity, even out to five years, so MM funds now are pretty attractive if you are averse to term risk that is not well compensated. Of course the flip side is that you are more exposed to reinvestment risk by staying very short term.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by GoldStar » Thu Jan 31, 2019 11:37 am

After avoiding MMs for HY-Savings accounts for the last decade for my immediate Emergency-Funds - sounds it like it is finally time to switch back.

Thanks for the Public-Service-Announcement Kevin.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by indexfundfan » Thu Jan 31, 2019 12:06 pm

Kevin M wrote:
Thu Jan 31, 2019 11:34 am
However, my taxable-equivalent SEC yield (TEY) for Vanguard Treasury MM fund is even higher at 2.61% (2.64% on an APY basis); that's at an SEC yield of 2.32%, and marginal tax rates of 27% fed and 8% state (it's mainly the state tax exemption that boosts the TEY of Treasury MM). And Treasury MM is even safer than Prime MM--I think it's probably about as safe as an FDIC-insured bank account, given that its holdings are 100% Treasury Bills. One downside is that the initial investment is $50K, but once the fund is open, your balance can drop below that and the fund will remain open (I've had less than $1K in the fund at times).
How did you end up with 2.61% taxable-equivalent SEC yield (TEY) for the Vanguard Treasury MM fund? Was it a typo for 2.51%?

I have switched from VUSXX to VMMXX since my marginal state tax bracket is only 5.75%. Plus about 30% of VMMXX is invested in USGO, so this portion is also state-tax free for my state.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by jeff1949 » Thu Jan 31, 2019 12:25 pm

Just this month I added the Treasury MMF to my taxable (state tax is 9% here in Oregon) and the Prime MMF for my Roth IRA after avoiding both of these MMFs for the past decade.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by deskjockey » Thu Jan 31, 2019 12:31 pm

indexfundfan wrote:
Thu Jan 31, 2019 12:06 pm
How did you end up with 2.61% taxable-equivalent SEC yield (TEY) for the Vanguard Treasury MM fund? Was it a typo for 2.51%?

I have switched from VUSXX to VMMXX since my marginal state tax bracket is only 5.75%. Plus about 30% of VMMXX is invested in USGO, so this portion is also state-tax free for my state.
It's not a typo--I'm in the 27.8% federal and 5.75% state tax brackets and the TEY of VMMXX and VUSXX are identical for me, so I can see how VUSXX would be even more favorable compared to VMMXX with higher state taxes.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by 28fe6 » Thu Jan 31, 2019 12:42 pm

How does one calculate their personal tax-equivalent yield for the purpose of choosing between Federal MM and Prime MM? Is it as simple as multiplying the yield by one's state marginal tax rate? Are both funds taxed equally for Federal tax?

The Vanguard website shows a figure for Tax-equivalent yield, but I don't know if that matches my personal situation.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by MotoTrojan » Thu Jan 31, 2019 12:48 pm

28fe6 wrote:
Thu Jan 31, 2019 12:42 pm
How does one calculate their personal tax-equivalent yield for the purpose of choosing between Federal MM and Prime MM? Is it as simple as multiplying the yield by one's state marginal tax rate? Are both funds taxed equally for Federal tax?

The Vanguard website shows a figure for Tax-equivalent yield, but I don't know if that matches my personal situation.
Divide the tax-exempt fund by 1.XX with XX being your tax-rate that will be exempted.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by 28fe6 » Thu Jan 31, 2019 12:52 pm

Divide the tax-exempt fund by 1.XX with XX being your tax-rate that will be exempted.
Thank you. What tax-rates are exempted if I choose the Federal vs. Prime?

I live in Idaho and I am a modest 1-income family.

This is my calculation:
ID marginal state tax rate: 0.074
1-0.074=0.926
Prime MM yield: 0.0248
Tax equivalent Yield=Prime MM yield*0.926=2.3%
Last edited by 28fe6 on Thu Jan 31, 2019 1:21 pm, edited 1 time in total.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by ReformedSpender » Thu Jan 31, 2019 12:54 pm

Time to switch from Capital One

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Last edited by ReformedSpender on Thu Jan 31, 2019 2:20 pm, edited 3 times in total.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by goodenyou » Thu Jan 31, 2019 1:02 pm

I’m in a no state income tax state, so I don’t have any calculation to do. My dilemma is whether to reach for yield in intermediate tax exempt and take interest rate risk or not. Apparently there is no immediate risk! I am in the highest marginal Federal bracket. The MMF as a bond proxy with little upside on the longer end has me questioning the value of the longer end. Long term it matters. It’s the same stay the course philosophy. Watching stocks and bonds drop in a rising interest rate environment is disconcerting.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 1:20 pm

indexfundfan wrote:
Thu Jan 31, 2019 12:06 pm
Kevin M wrote:
Thu Jan 31, 2019 11:34 am
However, my taxable-equivalent SEC yield (TEY) for Vanguard Treasury MM fund is even higher at 2.61% (2.64% on an APY basis); that's at an SEC yield of 2.32%, and marginal tax rates of 27% fed and 8% state (it's mainly the state tax exemption that boosts the TEY of Treasury MM). And Treasury MM is even safer than Prime MM--I think it's probably about as safe as an FDIC-insured bank account, given that its holdings are 100% Treasury Bills. One downside is that the initial investment is $50K, but once the fund is open, your balance can drop below that and the fund will remain open (I've had less than $1K in the fund at times).
How did you end up with 2.61% taxable-equivalent SEC yield (TEY) for the Vanguard Treasury MM fund? Was it a typo for 2.51%?
TEY(t) = Y(t) * (1-f) / (1 - f - s)

or we can just calculate the TEY factor as (1-f)/(1-f-s) then multiple the Treasury yield by it (easier if going to do this calculation for multiple funds and/or individual Treasuries in a spreadsheet.

So, for me, the factor is (1-27%)/(1-27%-8%) = 1.123, and TEY is 1.123*2.32% = 2.61%.
I have switched from VUSXX to VMMXX since my marginal state tax bracket is only 5.75%. Plus about 30% of VMMXX is invested in USGO, so this portion is also state-tax free for my state.
Unless you itemize and get a full deduction on Schedule A for state income taxes on your marginal interest income (unusual these days, with the SALT cap and higher standard deduction), your marginal federal tax rate has some impact. If your marginal fed tax rate is 22%, for example, TEY (SEC) of VUSXX is 2.50%, so slightly higher than Prime MM, but close enough that it doesn't matter.

If your federal marginal tax rate is higher, TEY is a little higher, e.g., 2.51% at 24% marginal. At 12% fed marginal, TEY is 2.48%, so equal to Prime MM. Since Treasury MM is safer, I would prefer it over Prime if the rates are about the same.

Be sure to use marginal tax rates, not tax brackets. My federal tax bracket is 12%, but marginal rate is 27% due to marginal ordinary income pushing QD/LTCG from 0% to 15% tax rate. Many other factors can cause marginal tax rates to be different than tax brackets. High income folks also need to consider NIIT of 3.8%.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Clever_Username » Thu Jan 31, 2019 1:27 pm

This is exciting. This is the time of year I start parking my summer expenses in savings, and was going to use VMMXX anyway... now I'm getting some good return for it! Thank you for sharing the good news.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by NYCPete » Thu Jan 31, 2019 1:32 pm

For those less math inclined (or lazy, like me! :P ), I've been using Eaton Vance's Tax Equivalent Yield (TEY) calculator for years, and it can work for many people's situations. EV keeps updating it with tax changes and it has continued to be useful. Notably, for us NYers it can input local taxes (NYC or Yonkers) into the equation as well.

https://funds.eatonvance.com/tax-equiva ... ulator.php
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 1:37 pm

28fe6 wrote:
Thu Jan 31, 2019 12:42 pm
How does one calculate their personal tax-equivalent yield for the purpose of choosing between Federal MM and Prime MM? Is it as simple as multiplying the yield by one's state marginal tax rate? Are both funds taxed equally for Federal tax?

The Vanguard website shows a figure for Tax-equivalent yield, but I don't know if that matches my personal situation.
Federal MM is a a little tricky, since it depends on the percentage of income from US government obligations, as that is what is exempt from state income tax (at least in my state, and I think it's similar in most states). For 2018, it was about 78%, so I'm using that in my current calculations. The formula for the factor then is:

=(1-ft)/(1-ft - 0.78*st) *

= (1-f-(1-g)*s) / (1-f-s)

which can also be written as:

= (1-f-s+g*s) / (1-f-s)

Which comes out to 1.093 1.096 for me (compared to 1.123 for Treasury MM). That gives me a slightly higher TEY for Federal MM than Prime MM, at 2.53% 2.54% compared to 2.48% (TE SEC Y). So in a taxable account, I'd be better off leaving it in the Fed MM settlement fund than exchanging it to Prime MM, if I didn't have Treasury MM.

The tricky part is that it changes from year to year, so we don't know what it will be for 2019. Looking at the percentage of current holdings in US government obligations might help--if it's as high or higher than for 2018, then I'd guess that the percentage of income also will be as high or higher.

For my state, the percent of holdings in US government obligations must be at least 50% to get any state tax exemption at all, and Federal MM currently meets this criterion. Website shows Treasury Bills at 52.5% and other US government obligations at 31% as of 12/31/2018, so I would think this counts as 83.5% in US government. However, Vanguard's U.S. government obligations information tax form shows it was 79.51% as of 12/31/2018 (and the exact % of income from US govt obligations was 77.79%). Not sure what accounts for the small discrepancy between the website and the tax form.

Kevin

* Edited to correct the factor. Here is the derivation of the correct formula:

TFY = TEY * (1 - f - s) = Yg * (1 - f - (1-g)*s) = Yg * (1 - f - s + g*s)

Where f and s = federal and state marginal tax rates, Yg is yield of a fund that holds some, but not all, US government securities (exempt from state tax), and g is the percentage of US government holdings (yield for an in-state muni yield = TFY, since there are no federal or state taxes). You pay federal and state taxes on the yield of fully taxable securities (TEY). You pay federal tax on Yg, and you pay state tax on Yg for the the non-US government portion of the fund's holdings (1-g).

Solving this equation for TEY in terms of Yg:

Partial US government TEY = Yg * (1-f-(1-g)*s) / (1-f-s) = Yg * (1-f-s+g*s) / (1-f-s)

(I've provided two forms of the TEY factor; use whichever one you find more convenient).

An intuitive way to think of this is that you first reduce the yield on the fund to it's after-tax value, then divide by the factor that you would apply to a fully tax-free security, like an in-state muni.
Last edited by Kevin M on Mon Feb 04, 2019 11:32 am, edited 1 time in total.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Riley15 » Thu Jan 31, 2019 1:45 pm

Kevin M wrote:
Thu Jan 31, 2019 1:20 pm
indexfundfan wrote:
Thu Jan 31, 2019 12:06 pm
Kevin M wrote:
Thu Jan 31, 2019 11:34 am
However, my taxable-equivalent SEC yield (TEY) for Vanguard Treasury MM fund is even higher at 2.61% (2.64% on an APY basis); that's at an SEC yield of 2.32%, and marginal tax rates of 27% fed and 8% state (it's mainly the state tax exemption that boosts the TEY of Treasury MM). And Treasury MM is even safer than Prime MM--I think it's probably about as safe as an FDIC-insured bank account, given that its holdings are 100% Treasury Bills. One downside is that the initial investment is $50K, but once the fund is open, your balance can drop below that and the fund will remain open (I've had less than $1K in the fund at times).
How did you end up with 2.61% taxable-equivalent SEC yield (TEY) for the Vanguard Treasury MM fund? Was it a typo for 2.51%?
TEY(t) = Y(t) * (1-f) / (1 - f - s)

or we can just calculate the TEY factor as (1-f)/(1-f-s) then multiple the Treasury yield by it (easier if going to do this calculation for multiple funds and/or individual Treasuries in a spreadsheet.

So, for me, the factor is (1-27%)/(1-27%-8%) = 1.123, and TEY is 1.123*2.32% = 2.61%.
I have switched from VUSXX to VMMXX since my marginal state tax bracket is only 5.75%. Plus about 30% of VMMXX is invested in USGO, so this portion is also state-tax free for my state.
Unless you itemize and get a full deduction on Schedule A for state income taxes on your marginal interest income (unusual these days, with the SALT cap and higher standard deduction), your marginal federal tax rate has some impact. If your marginal fed tax rate is 22%, for example, TEY (SEC) of VUSXX is 2.50%, so slightly higher than Prime MM, but close enough that it doesn't matter.

If your federal marginal tax rate is higher, TEY is a little higher, e.g., 2.51% at 24% marginal. At 12% fed marginal, TEY is 2.48%, so equal to Prime MM. Since Treasury MM is safer, I would prefer it over Prime if the rates are about the same.

Be sure to use marginal tax rates, not tax brackets. My federal tax bracket is 12%, but marginal rate is 27% due to marginal ordinary income pushing QD/LTCG from 0% to 15% tax rate. Many other factors can cause marginal tax rates to be different than tax brackets. High income folks also need to consider NIIT of 3.8%.

Kevin

I don't understand how you're calculating TEY for Treasury MM? The Treasury MM is only State Tax Exempt not Federal so why would you ever consider federal tax rate into the calculation? Isn't it simply 2.32/(1-0.08) = 2.52%

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Doc » Thu Jan 31, 2019 1:45 pm

Kevin M wrote:
Thu Jan 31, 2019 11:34 am
One downside is that the initial investment is $50K, but once the fund is open, your balance can drop below that and the fund will remain open (I've had less than $1K in the fund at times).
Kevin, do you know if this "no downgrade" applies to other active funds which are not money markets?
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 2:16 pm

Doc wrote:
Thu Jan 31, 2019 1:45 pm
Kevin M wrote:
Thu Jan 31, 2019 11:34 am
One downside is that the initial investment is $50K, but once the fund is open, your balance can drop below that and the fund will remain open (I've had less than $1K in the fund at times).
Kevin, do you know if this "no downgrade" applies to other active funds which are not money markets?
In my experience, yes--at least for some period of time, and perhaps depending on how you get below the minimum. I have Admiral shares of active bond funds that have been below $50K for a few years, and they have not been downgraded to investor shares. I have seen them downgraded in other family accounts though. I think they review them once per year, and whether or not they downgrade may be due to whether they fall below the minimum is due to withdrawals or price drop. They may also consider your "status"; e.g., Flagship, Voyager, Voyager Select; don't really know.

I have had investor shares of MM funds for years with a dollar or two in them (the muni MM funds, which used to be attractive), and they have never been closed (minimum to open is $3K).

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Pigeye Brewster » Thu Jan 31, 2019 2:21 pm

Riley15 wrote:
Thu Jan 31, 2019 1:45 pm
Kevin M wrote:
Thu Jan 31, 2019 1:20 pm
indexfundfan wrote:
Thu Jan 31, 2019 12:06 pm
Kevin M wrote:
Thu Jan 31, 2019 11:34 am
However, my taxable-equivalent SEC yield (TEY) for Vanguard Treasury MM fund is even higher at 2.61% (2.64% on an APY basis); that's at an SEC yield of 2.32%, and marginal tax rates of 27% fed and 8% state (it's mainly the state tax exemption that boosts the TEY of Treasury MM). And Treasury MM is even safer than Prime MM--I think it's probably about as safe as an FDIC-insured bank account, given that its holdings are 100% Treasury Bills. One downside is that the initial investment is $50K, but once the fund is open, your balance can drop below that and the fund will remain open (I've had less than $1K in the fund at times).
How did you end up with 2.61% taxable-equivalent SEC yield (TEY) for the Vanguard Treasury MM fund? Was it a typo for 2.51%?
TEY(t) = Y(t) * (1-f) / (1 - f - s)

or we can just calculate the TEY factor as (1-f)/(1-f-s) then multiple the Treasury yield by it (easier if going to do this calculation for multiple funds and/or individual Treasuries in a spreadsheet.

So, for me, the factor is (1-27%)/(1-27%-8%) = 1.123, and TEY is 1.123*2.32% = 2.61%.
I have switched from VUSXX to VMMXX since my marginal state tax bracket is only 5.75%. Plus about 30% of VMMXX is invested in USGO, so this portion is also state-tax free for my state.
Unless you itemize and get a full deduction on Schedule A for state income taxes on your marginal interest income (unusual these days, with the SALT cap and higher standard deduction), your marginal federal tax rate has some impact. If your marginal fed tax rate is 22%, for example, TEY (SEC) of VUSXX is 2.50%, so slightly higher than Prime MM, but close enough that it doesn't matter.

If your federal marginal tax rate is higher, TEY is a little higher, e.g., 2.51% at 24% marginal. At 12% fed marginal, TEY is 2.48%, so equal to Prime MM. Since Treasury MM is safer, I would prefer it over Prime if the rates are about the same.

Be sure to use marginal tax rates, not tax brackets. My federal tax bracket is 12%, but marginal rate is 27% due to marginal ordinary income pushing QD/LTCG from 0% to 15% tax rate. Many other factors can cause marginal tax rates to be different than tax brackets. High income folks also need to consider NIIT of 3.8%.

Kevin

I don't understand how you're calculating TEY for Treasury MM? The Treasury MM is only State Tax Exempt not Federal so why would you ever consider federal tax rate into the calculation? Isn't it simply 2.32/(1-0.08) = 2.52%
He's converting the gross yield into an after-tax yield, then dividing the after-tax yield by the full taxable equivalency factor.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 2:21 pm

Riley15 wrote:
Thu Jan 31, 2019 1:45 pm
I don't understand how you're calculating TEY for Treasury MM? The Treasury MM is only State Tax Exempt not Federal so why would you ever consider federal tax rate into the calculation? Isn't it simply 2.32/(1-0.08) = 2.52%
See the various TEY derivations in this post: Taxable Equivalent Yield (TEY). Your simpler formula would apply if you itemized and got a full deduction for state income taxes on Schedule A for marginal interest income.

Someone who enjoys doing BH Wiki articles might consider turning my TEY post into one. I was surprised that we don't have one already, and have been too lazy to do it myself, although I have written BH Wiki articles in the distant past. I've just bookmarked my post so I can easily access it to share when questions like this come up.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 2:23 pm

Pigeye Brewster wrote:
Thu Jan 31, 2019 2:21 pm
He's converting the gross yield into an after-tax yield, then dividing the after-tax yield by the full taxable equivalency factor.
That's a great way to summarize it, and the way I originally came to think about it when I derived the formulas.

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 2:31 pm

28fe6 wrote:
Thu Jan 31, 2019 12:52 pm
Divide the tax-exempt fund by 1.XX with XX being your tax-rate that will be exempted.
Thank you. What tax-rates are exempted if I choose the Federal vs. Prime?

I live in Idaho and I am a modest 1-income family.

This is my calculation:
ID marginal state tax rate: 0.074
1-0.074=0.926
Prime MM yield: 0.0248
Tax equivalent Yield=Prime MM yield*0.926=2.3%
This is not correct.

First, if ID is like CA, you only get a deduction for the portion of Federal MM income that is from US government obligations, which was about 78% for 2018.

Second, Prime MM raw yield is its TEY, since it is fully taxed (at least in my state, and I think most states). You convert the tax-advantaged fund yields to TEY, not the yields of fully taxable funds.

Look at the formula I shared to see how to do the math. Or, tell me your marginal federal tax rate, and I'll give you the factor to multiply by, and tell you the TEY for you of Federal MM. Remember, it's important to use marginal tax rates, not tax brackets, in the formulas.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Pigeye Brewster » Thu Jan 31, 2019 2:33 pm

Kevin M wrote:
Thu Jan 31, 2019 2:23 pm
Pigeye Brewster wrote:
Thu Jan 31, 2019 2:21 pm
He's converting the gross yield into an after-tax yield, then dividing the after-tax yield by the full taxable equivalency factor.
That's a great way to summarize it, and the way I originally came to think about it when I derived the formulas.

Kevin
Your formula is the Swiss Army knife of TEY calculations... :beer

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Triple digit golfer » Thu Jan 31, 2019 3:10 pm

The way to do it is to simply take the total after-tax yield for both.

Assume:
PMM yield 2.51%
TMM yield 2.32%
Federal marginal rate 22%
State+Local marginal rate 5%

PMM after-tax yield = 2.51% x (1-.22-.05) = 1.83%
TMM after-tax yield = 2.32% x (1-.22) = 1.81%

Assuming a 32% federal marginal rate, the numbers are 1.581% and 1.577%.

Assuming a 37% federal marginal rate, the numbers are 1.455% and 1.461%. It flipped and now TMM is more beneficial.

Let's say marginal rates go to 55% someday. The numbers are then 1.00% and 1.04%, making the gap even larger.

You can't do the analysis only calculating based on (1-exempt yield). You have to factor in the taxable yield also.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Gufomel » Thu Jan 31, 2019 3:11 pm

Prime Money Market at 2.48% and Intermediate Term Bonds (BIV) at 3.28%.

Almost makes bonds seem useless. Yikes.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by BBBob » Thu Jan 31, 2019 3:47 pm

Don't you have to subtract the expense ratio from the yield to see what you are netting? For Prime MM, that would be 2.51% - 0.16% = 2.35%

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Re: Vanguard Prime Money Market yield over 2.5%

Post by deskjockey » Thu Jan 31, 2019 3:59 pm

BBBob wrote:
Thu Jan 31, 2019 3:47 pm
Don't you have to subtract the expense ratio from the yield to see what you are netting? For Prime MM, that would be 2.51% - 0.16% = 2.35%
No, the expense ratio already is factored into the yield.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Pigeye Brewster » Thu Jan 31, 2019 4:08 pm

BBBob wrote:
Thu Jan 31, 2019 3:47 pm
Don't you have to subtract the expense ratio from the yield to see what you are netting? For Prime MM, that would be 2.51% - 0.16% = 2.35%
The reported yields are already net of expenses.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by bgf » Thu Jan 31, 2019 4:25 pm

what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 5:22 pm

bgf wrote:
Thu Jan 31, 2019 4:25 pm
what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?
The main disadvantage is no FDIC insurance on MM funds, but as I said, I think that's not much of a consideration in the current economic environment. If things started to deteriorate, I'd rethink that. A related issue is that withdrawals can be restricted if the MM fund gets into trouble; I don't believe that's the case for Federal MM fund, and perhaps not for Treasury MM fund, but I'm not worried about that now.

Another disadvantage is that you can't transfer money out of Vanguard for 7 days after transferring it in, so you have to keep this in mind.

However, this doesn't seem to apply if you have a margin account. I tested this by transferring $50K into a new Treasury MM fund in my Vanguard Advantage brokerage account, which is a margin account (I already had Treasury MM in my old-platform mutual fund account, but I wanted to see if it worked differently in the brokerage account). The next day I sold $20 of Treasury MM, which went into Federal MM settlement fund, and I also entered an order at Schwab to buy $20 of a money market fund there, specifying my Vanguard Advantage account as the source of the funds. Money came out of the VG Federal MM fund the next day. I have not been charged any margin interest, so even though my account still shows a hold on $50K, it's effectively not being enforced.

One advantage is that you don't have the limit of 6 outgoing transactions per month, as you have on a bank savings account.

I'm finding that the transactions either to or from Ally from or to Vanguard happen same day, but if initiated at Ally, must be scheduled the day before; i.e., the money leaves one account and arrives in the other on the same day. If I do the buy on the Vanguard side before market closes, money comes out of Ally the next day, but as far as I can tell, interest starts accruing in the MM fund on the day of the transaction. This is different than in the old-platform mutual fund account, in which interest does not start accruing until the next trading day.

At least this is what I'm seeing by looking at the Balances by date for each successive day.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by travelogue » Thu Jan 31, 2019 5:25 pm

bgf wrote:
Thu Jan 31, 2019 4:25 pm
what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?
Takes more time to transfer funds back to a bank and use them. CO360 can move between Capital One accounts instantly. No FDIC insurance (not a big deal IMO). I’m slowly moving more funds to Vanguard from my CO360 MMA to take advantage of the better MMF rates.

Ally at 2.2% in their savings accounts with no minimum balance is another complementary option to a Vanguard MMF if you want funds you can quickly move to a checking account in the same institution.

Edit: Plus what Kevin M said above!
Last edited by travelogue on Thu Jan 31, 2019 5:54 pm, edited 1 time in total.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Phineas J. Whoopee » Thu Jan 31, 2019 5:38 pm

Kevin M wrote:
Thu Jan 31, 2019 5:22 pm
bgf wrote:
Thu Jan 31, 2019 4:25 pm
what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?
The main disadvantage is no FDIC insurance on MM funds, but as I said, I think that's not much of a consideration in the current economic environment. If things started to deteriorate, I'd rethink that. A related issue is that withdrawals can be restricted if the MM fund gets into trouble; I don't believe that's the case for Federal MM fund, and perhaps not for Treasury MM fund, but I'm not worried about that now.
...
Money market fund sponsors can always delay payment by up to 7 days, or for longer if the SEC declares an emergency, and can redeem in kind.

The main difference is between retail and institutional money market funds. The latter must precisely calculate and publish a net asset value. The former can continue using the $1.00 per share accounting fiction.

See this Investopedia article: 4 Factors to Know About Money Market Reform in 2016

Vanguard's retail federal and Treasury money market funds are not subject to the newly-invented gates and fees, but they still have the other mechanisms they've always had.

I too would feel completely comfortable with investments in Vanguard's Prime Money Market Fund, VMMXX. It's good to know how it works after the October 2016 reform, that's all.

PJW

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Corgitodd » Thu Jan 31, 2019 5:49 pm

Citizens online savings is now 2.35 percent

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Re: Vanguard Prime Money Market yield over 2.5%

Post by billfromct » Thu Jan 31, 2019 6:23 pm

According to the 2018 Vanguard "U.S. government obligation information" document, 28.23% of Prime MM income is from "U.S. government obligations", so I'm assuming 28.23% of the interest is not counted towards state taxable income.

I didn't count 28.23% of my Prime MM interest on my state return.

The tax return software has a process to take care of this.

bill

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Re: Vanguard Prime Money Market yield over 2.5%

Post by GoldenFinch » Thu Jan 31, 2019 7:16 pm

Pigeye Brewster wrote:
Thu Jan 31, 2019 4:08 pm
BBBob wrote:
Thu Jan 31, 2019 3:47 pm
Don't you have to subtract the expense ratio from the yield to see what you are netting? For Prime MM, that would be 2.51% - 0.16% = 2.35%
The reported yields are already net of expenses.
Thank you! I learned something new.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by RickBoglehead » Thu Jan 31, 2019 7:24 pm

billfromct wrote:
Thu Jan 31, 2019 6:23 pm
According to the 2018 Vanguard "U.S. government obligation information" document, 28.23% of Prime MM income is from "U.S. government obligations", so I'm assuming 28.23% of the interest is not counted towards state taxable income.

I didn't count 28.23% of my Prime MM interest on my state return.

The tax return software has a process to take care of this.

bill
That is true in many, but not all states. California requires 50%. Don't know how many other states have an unusual requirement like that.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by billfromct » Thu Jan 31, 2019 8:29 pm

RickBoglehead,

I believe all states are prohibited from taxing interest income from "obligations of the United States", including California.

Check "the Google"

Maybe you misunderstood. States cannot make you pay state income tax on interest income from U.S. Government obligations.

bill

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Re: Vanguard Prime Money Market yield over 2.5%

Post by ReformedSpender » Thu Jan 31, 2019 8:48 pm

travelogue wrote:
Thu Jan 31, 2019 5:25 pm
bgf wrote:
Thu Jan 31, 2019 4:25 pm
what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?
Takes more time to transfer funds back to a bank and use them. CO360 can move between Capital One accounts instantly. No FDIC insurance (not a big deal IMO). I’m slowly moving more funds to Vanguard from my CO360 MMA to take advantage of the better MMF rates.

Ally at 2.2% in their savings accounts with no minimum balance is another complementary option to a Vanguard MMF if you want funds you can quickly move to a checking account in the same institution.

Edit: Plus what Kevin M said above!
Capital One is really losing its luster (imo)
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 8:52 pm

travelogue wrote:
Thu Jan 31, 2019 5:25 pm
bgf wrote:
Thu Jan 31, 2019 4:25 pm
what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?
Takes more time to transfer funds back to a bank and use them. CO360 can move between Capital One accounts instantly. No FDIC insurance (not a big deal IMO). I’m slowly moving more funds to Vanguard from my CO360 MMA to take advantage of the better MMF rates.

Ally at 2.2% in their savings accounts with no minimum balance is another complementary option to a Vanguard MMF if you want funds you can quickly move to a checking account in the same institution.

Edit: Plus what Kevin M said above!
Yes, there are many benefits to bank accounts at a bank like Ally, but for an emergency fund, these aren't particularly relevant, except for the part of the EF that you might need in less than a day. Come to think of it, even for same day, I can wire from Vanguard for free, but would have to do that early enough in the day--don't have experience with that though, so not sure about cutoff times, etc.

I use Ally as my hub bank, and love it. I just don't want to keep too much cash there at current rates. With next-business day transfers available from Vanguard, I really only need to keep enough cash there for very short term needs, but for convenience of paying bills and unexpected emergencies, I keep enough to pay bills for about two weeks to a month. I can schedule a transfer from Vanguard to Ally in advance, on a date when I know my checking or savings account balance will drop below my comfort level. I schedule several transfers from savings to checking each month, to cover the bills that will be paid from checking in the next week or so.

So the typical flow for paying bills is Vanguard Treasury MM -> Ally savings -> Ally checking.

The overdraft feature is nice too, as long as you keep the 6-outgoing transaction limitation in mind. For example, I bought some more of the Treasury MM fund specifying an Ally checking account as the source (since that's the account I already had linked at Vanguard), but the proceeds, are in an Ally savings account that serves as the overdraft source for the checking account (I had deposited a check to that savings account using mobile deposit, which of course also is a great feature to have at a bank). At least this way I'll earn the 2.2% APY in the savings account until the money is pulled from the Ally checking account, triggering the overdraft transfer from savings.

I have several savings and checking accounts at Ally, with each checking account using a different savings account for overdrafts. This enables me to not worry much about the limitation of six transfers per month.

As I think about it, I should think about paying more bills directly from my Vanguard Advantage account. The Federal MM settlement fund would substitute for the Ally checking account, but with a much higher interest rate, and the Treasury MM fund would substitute for the Ally savings account, also with a higher interest rate. With the Federal MM fund paying a decent rate, I could be less anal about keeping that balance to a minimum, as I am with my Ally checking account.

It would be nice if Vanguard would pull from non-settlement money market funds to settle trades or other cash deficits, as Fidelity does, but unfortunately they don't, and unfortunately Fidelity MM funds have lower yields than Vanguard.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Jan 31, 2019 9:03 pm

billfromct wrote:
Thu Jan 31, 2019 8:29 pm
RickBoglehead,

I believe all states are prohibited from taxing interest income from "obligations of the United States", including California.

Check "the Google"

Maybe you misunderstood. States cannot make you pay state income tax on interest income from U.S. Government obligations.

bill
Sorry, but you're wrong. CA does have a 50% of assets in US Government obligations requirement to get any deduction for US government income from a mutual fund. Vanguard even has a footnote in their US Government obligations document specifying which of their funds meet this requirement.
** This fund meets the threshold requirements for California, Connecticut, and New York, which require that 50% of the fund’s assets at each quarter-end within the tax year consist of U.S. government obligations.
Only the funds with ** next to them meet this requirement. We can see from the footnote that New York and Connecticut have the same requirement as CA.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by RickBoglehead » Thu Jan 31, 2019 9:10 pm

Multiple Ally Savings accounts solve the 6 per month limit.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by billfromct » Thu Jan 31, 2019 9:48 pm

I stand corrected. I thought no state could tax U.S. Government interest income. I guess there must be a rule for U.S. interest income from mutual funds for CA, CT & NY.

I knew there would be a future reason for me to move from CT 40 years ago.

bill

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Geologist » Thu Jan 31, 2019 10:26 pm

billfromct wrote:
Thu Jan 31, 2019 9:48 pm
I stand corrected. I thought no state could tax U.S. Government interest income. I guess there must be a rule for U.S. interest income from mutual funds for CA, CT & NY.

I knew there would be a future reason for me to move from CT 40 years ago.

bill
No state can tax US Government interest income. The situation is here that you aren't receiving US Government interest income, but dividends from Vanguard's Prime Money Market fund. A state can choose to treat US Government interest received by a mutual fund and paid as part of its dividend as if the dividend recipient is receiving it directly, but is not obligated to do so.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by MotoTrojan » Thu Jan 31, 2019 11:43 pm

28fe6 wrote:
Thu Jan 31, 2019 12:52 pm
Divide the tax-exempt fund by 1.XX with XX being your tax-rate that will be exempted.
Thank you. What tax-rates are exempted if I choose the Federal vs. Prime?

I live in Idaho and I am a modest 1-income family.

This is my calculation:
ID marginal state tax rate: 0.074
1-0.074=0.926
Prime MM yield: 0.0248
Tax equivalent Yield=Prime MM yield*0.926=2.3%
I believe only your federal marginal tax comes into play. I usually boost up the taxable yield (tax exempt yield divided by 1+marginal as I showed) but the comparison should be the same as yours.

Modest 1-income likely will get a better return with prime, but your federal marginal tax is probably higher than 7.4% so do the math.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by indexonlyplease » Fri Feb 01, 2019 6:27 am

Go Vanguard PMM. I have placed all my savings that I don't want in the market funds. Also, when cd's close this year will move the money there also. The rate just keep going up. No state tax here so PMM best for me to park cash.

Keep posting those rates. I don't look that often at Vanguard.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by EZ James » Fri Feb 01, 2019 3:30 pm

I am confused by the first sentence in the OP: "Vanguard Prime Money Market SEC yield now is 2.48%, which is a compound yield of 2.51%. The compound yield is what you'd use to compare to the APY (annual percentage yield) of a bank account, which is why the post title says the yield is over 2.5%."

The 2.48% is the "Average annualized income income dividend over the past 7 days" according to Vanguard.

Since the 2.48% has been "annualized" by some SEC algorithm I assumed that would be the current dividend APY.

Could someone please explain the math to go from 2.48 to 2.51?

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Andyrunner » Fri Feb 01, 2019 4:00 pm

Funny enough last month I moved over some of my emergency fund from savings to this. My mortgage rate is currently 2.99%, If this tops my mortgage I should think again where my extra mortgage payments are going.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Fri Feb 01, 2019 4:22 pm

MotoTrojan wrote:
Thu Jan 31, 2019 11:43 pm
28fe6 wrote:
Thu Jan 31, 2019 12:52 pm
Divide the tax-exempt fund by 1.XX with XX being your tax-rate that will be exempted.
Thank you. What tax-rates are exempted if I choose the Federal vs. Prime?

I live in Idaho and I am a modest 1-income family.

This is my calculation:
ID marginal state tax rate: 0.074
1-0.074=0.926
Prime MM yield: 0.0248
Tax equivalent Yield=Prime MM yield*0.926=2.3%
I believe only your federal marginal tax comes into play.
Wrong! It's mainly the marginal state tax rate that boosts the TEY of Federal MM fund, due to it holding about 78% in US Government obligations, which are exempt from state tax.

The Federal marginal tax rate also has some impact unless you itemize deductions and get a full deduction for state income taxes on federal schedule a for marginal interest income.

28fe6' s calculation has multiple problems, as I explained in this reply above.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Fri Feb 01, 2019 4:42 pm

EZ James wrote:
Fri Feb 01, 2019 3:30 pm
I am confused by the first sentence in the OP: "Vanguard Prime Money Market SEC yield now is 2.48%, which is a compound yield of 2.51%. The compound yield is what you'd use to compare to the APY (annual percentage yield) of a bank account, which is why the post title says the yield is over 2.5%."

The 2.48% is the "Average annualized income income dividend over the past 7 days" according to Vanguard.

Since the 2.48% has been "annualized" by some SEC algorithm I assumed that would be the current dividend APY.

Could someone please explain the math to go from 2.48 to 2.51?
First, Vanguard shows both the SEC yield and "compound yield" on it's overview web page for the fund: https://investor.vanguard.com/mutual-fu ... file/VMMXX. It shows 2.48% and 2.51% respectively.

Annualizing the 7-day yield is not compounding it. It's doing something like Income7day/7*365, where Income7day is the 7-day income per share (with share price = $1.00). To get the compound yield, it's something like Yc = (1+Ysec/365)^365-1 = (1+0.0248/365)^365-1 = 2.51%.

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by EZ James » Fri Feb 01, 2019 5:24 pm

Thank you very much for the link and math Kevin.

For so many years I have been using the wrong yield number! The term "annualized" is what threw me as I thought that implied compounding and did not drill down to the details in your link.

I am mostly in fixed income so this is significant. Thanks again.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Fri Feb 01, 2019 6:51 pm

EZ James wrote:
Fri Feb 01, 2019 5:24 pm
Thank you very much for the link and math Kevin.

For so many years I have been using the wrong yield number! The term "annualized" is what threw me as I thought that implied compounding and did not drill down to the details in your link.

I am mostly in fixed income so this is significant. Thanks again.
I think more often than not, "annualized" is related to compound growth, but you have to look at the context if it's not spelled out. We can get a hint by Vanguard's definition of distribution yield:
The fund's current monthly income dividend per share, annualized by dividing by the number of days in the month and multiplying by 365, and shown as a percentage of the fund's average net asset value (NAV) during the month.
(underline mine, since that's essentially what I think they're doing for 7-day SEC yield)

The other hint is that Vanguard provides a compound yield figure, implying that the 7-day SEC yield is not a compound yield figure.

At smaller yields, which we've had for some years now, it doesn't make that much difference--in the case of the current Prime MM fund yield, it's only 3 basis points. In other words, the "interest on interest" doesn't amount to much at such low yields.

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