VMMXX Tax Efficiency

[eschersenigma]

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

From the portfolio's composition:



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



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]

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

[gostars]

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).

[eschersenigma]

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.