VMMXX Tax Efficiency

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eschersenigma
Posts: 6
Joined: Thu Aug 09, 2018 9:50 pm

VMMXX Tax Efficiency

Post by eschersenigma » Fri Aug 17, 2018 12:54 am

Can someone give me a sanity check on my logic surrounding VMMXX's tax efficiency?

From the portfolio's composition:

Image

It seems like this fund is almost entirely bonds, which going by the rough tax efficiency spectrum:

Image

means it's a relatively tax inefficient investment vehicle. However, VMMXX is touted as a great short-term investment vehicle as well, being often the first choice for many people's emergency fund allocation. This means long-term, tax-advantaged accounts (IRA, 401(k), etc.) are off the table; taxable brokerage accounts have to be used.

Is this simply an inevitable bit of tax inefficiency we have to stomach for this fund and others like it?

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: VMMXX Tax Efficiency

Post by HEDGEFUNDIE » Fri Aug 17, 2018 1:14 am

In the picture “low-yielding Bonds” are classified as green, tax-efficient.

gostars
Posts: 439
Joined: Mon Oct 09, 2017 7:53 pm

Re: VMMXX Tax Efficiency

Post by gostars » Fri Aug 17, 2018 1:18 am

Yes, the tax hit is the cost of having the emergency fund. It's no worse than holding the same money in high-yield savings or CD though. There is a wiki article on holding an emergency fund in a Roth IRA, but this mechanism requires a level of dedication that most of us don't possess, so most of us are better off with one of the other options, or some tiered combination of them (e.g. 3 weeks in savings, 3 months in MM, rest in a no-penalty CD).

Topic Author
eschersenigma
Posts: 6
Joined: Thu Aug 09, 2018 9:50 pm

Re: VMMXX Tax Efficiency

Post by eschersenigma » Fri Aug 17, 2018 1:50 am

HEDGEFUNDIE wrote:
Fri Aug 17, 2018 1:14 am
In the picture “low-yielding Bonds” are classified as green, tax-efficient.
Ah understood; I tunnel-visioned on the "most bonds" wording in the chart.

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