Tax Equivalent Money Market Yield

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Bimmer
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Tax Equivalent Money Market Yield

Post by Bimmer »

Not sure why I am struggling with these Tax-Equivalent Yield Calculations, but I am. Hoping someone will confirm my calculations or correct them. Trying to compare Vanguard MM funds to online savings accounts which are running 3.0-3.5% for my cash.

I am in 35% federal tax bracket (Married Filing Jointly).
State and Local Taxes are 9% (Maryland).

For Vanguard Treasury Money Market (VUSXX), 3.49% 7-day SEC yield, I calculate the TEY of 4.05% using the following calculation:

3.49 * (1-35%)/(1-44%) = 4.05%

For Vanguard Municipal Money Market (VMSXX), 1.86% 7-day SEC yield, I calculate the TEY yield of 3.02% using the following calculation:

1.86 * (1-9%)/(1-44%) = 3.02%

Are these correct?

Can anyone give me the equivalent calculation for Vanguard Federal Money Market (VMFXX)? I'm not sure what the exact tax treatment is for this money market fund. Is it also exempt from state and local taxes like VUSXX?

Thanks in advance for the responses.

-Bimmer
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sleepysurf
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Re: Tax Equivalent Money Market Yield

Post by sleepysurf »

There are other variables to consider, including marginal tax rate and filing status. I prefer to just use an online calculator like this... https://www.bankrate.com/retirement/tax ... ator-tool/
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Bimmer
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Re: Tax Equivalent Money Market Yield

Post by Bimmer »

Does this online calculator work for VUSXX Treasury MM fund? I'm not sure how to compare using this calculator, which I had seen.
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grabiner
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Re: Tax Equivalent Money Market Yield

Post by grabiner »

Bimmer wrote: Mon Nov 21, 2022 9:12 pm Can anyone give me the equivalent calculation for Vanguard Federal Money Market (VMFXX)? I'm not sure what the exact tax treatment is for this money market fund. Is it also exempt from state and local taxes like VUSXX?
In the Tax-Filing Information section of Vanguard, here is last year's Vanguard funds that held U.S. government bonds (i.e., government obligations)

For 2021, Vanguard Federal Money Market was 72.78% invested in Treasury bonds, so you would owe state tax on only 27.22% of the dividend.

(For investors in other states, make sure to check your state's rules. Most states allow an exemption for all the Treasury income on any fund which holds them, but CA, CT, and NY require that a fund be 50% invested in Treasuries each quarter to get even a partial exemption. In those states, Total Bond Market Index does not qualify, so you might prefer to split it into Treasury and corporate indexes. Intermediate-Term Bond Index usually qualifies but did not qualify in 2021.)
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Kevin M
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Re: Tax Equivalent Money Market Yield

Post by Kevin M »

See this thread in which I derive the formulas for Taxable equivalent yield (TEY).

For Treasuries or any other securities taxed by the fed but exempt from state taxes, this is the formula to use:

TEY = y * (1-f)/(1-f-s)

where f = federal marginal tax rate (including NIIT and anything else that impacts marginal rate), and s = state marginal income tax rate.

The numerator give you the after-tax yield (ATY), and the denominator converts that to a fully taxable yield (TEY).

I see that this is what you are calculating, but be sure to include NIIT, etc. for your Fed marginal rate.

Your muni TEY formula is correct as well, with the above caveat for the 35% fed marginal rate.

Latest published SEC yield for VUSXX is 3.52%, which is 4.09% TEY at your indicated marginal tax rates.

Latest published SEC yield for VMSXX is 1.81%, which is 2.94% TEY at your indicated marginal tax rates.

The problem with VMFXX is that we don't know how much of the income will be from USGO, or that the income will even qualify for a state tax exemption in CA and two other states, but not Maryland. Last year the percent USGO was about 73%, so I use that in my estimates of TEY for VMFXX, but I don't count on it, since I am in CA. VMFXX has been holding a high percentage in repurchase agreements, which do not qualify as USGO.

Currently I would use VUSXX in taxable at your marginal rates, and am doing so at mine which are 22% and 9.3%.

Image

(Chart is for your indicated marginal tax rates).

As you can see, there are times when the muni funds have higher TEYs for you, so you could switch into VMSXX when the yield cycles up again, as it will.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Bimmer
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Re: Tax Equivalent Money Market Yield

Post by Bimmer »

Kevin M wrote: Tue Nov 22, 2022 7:50 pm See this thread in which I derive the formulas for Taxable equivalent yield (TEY).

For Treasuries or any other securities taxed by the fed but exempt from state taxes, this is the formula to use:

TEY = y * (1-f)/(1-f-s)

where f = federal marginal tax rate (including NIIT and anything else that impacts marginal rate), and s = state marginal income tax rate.

The numerator give you the after-tax yield (ATY), and the denominator converts that to a fully taxable yield (TEY).

I see that this is what you are calculating, but be sure to include NIIT, etc. for your Fed marginal rate.

Your muni TEY formula is correct as well, with the above caveat for the 35% fed marginal rate.

Latest published SEC yield for VUSXX is 3.52%, which is 4.09% TEY at your indicated marginal tax rates.

Latest published SEC yield for VMSXX is 1.81%, which is 2.94% TEY at your indicated marginal tax rates.

The problem with VMFXX is that we don't know how much of the income will be from USGO, or that the income will even qualify for a state tax exemption in CA and two other states, but not Maryland. Last year the percent USGO was about 73%, so I use that in my estimates of TEY for VMFXX, but I don't count on it, since I am in CA. VMFXX has been holding a high percentage in repurchase agreements, which do not qualify as USGO.

Currently I would use VUSXX in taxable at your marginal rates, and am doing so at mine which are 22% and 9.3%.

Image

(Chart is for your indicated marginal tax rates).

As you can see, there are times when the muni funds have higher TEYs for you, so you could switch into VMSXX when the yield cycles up again, as it will.

Kevin
Kevin M,

Thanks so much for this reply. Exactly what I was looking for.

Best,

-Bimmer
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