Are money market funds exempt from federal income tax?
Although tax-exempt mutual funds usually produce lower yields, you generally don't have to pay federal taxes on earnings from tax-exempt money market and bond funds. And you can save even more if you live in a state that offers similar exemptions.
- Vanguard Tax-Exempt Bond ETF (VTEB)
- Fidelity Municipal Bond Index Fund (FMBIX)
- Schwab Tax-Free Bond Fund (SWNTX)
- Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)
- iShares California Muni Bond ETF (CMF)
- iShares New York Muni Bond ETF (NYF)
- BlackRock Short Maturity Municipal Bond ETF (MEAR)
Who Does Not Have to Pay Taxes? You generally don't have to pay taxes if your income is less than the standard deduction or the total of your itemized deductions, if you have a certain number of dependents, if you work abroad and are below the required thresholds, or if you're a qualifying non-profit organization.
The income from Treasury bonds has preferential tax treatment. It is exempt from state and local taxes, but not federal income taxes. Repurchase agreements, as investments held by SPAXX and FZSXX are not exempt from state and local taxes.
The tax-exempt sector includes bonds, notes, leases, bond funds, mutual funds, trusts, and life insurance, among other investment vehicles. Government municipal bond issuers offer a guarantee, since the taxing authority typically raises funds to repay any GO bond obligations.
Vanguard Municipal Money Market Fund seeks current income exempt from federal tax by investing in a variety of high-quality, short-term municipal securities.
Indirectly losing money, however, is a downside of money market accounts. Indirect loss can occur if the interest rates tied to the account fall, thus diminishing the initial return value of your account.
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.
For maximum safety, consider VUSXX. This government money market fund is even more conservative than VMFXX. The fund primarily invests in a portfolio of U.S. Treasury bills, or T-bills, which are government-issued bonds with less than one year remaining until maturity.
Exemptions refer to income that is not subject to taxation. For each exemption you claim, a certain amount of your income is excluded from being taxed. If you're eligible to claim exemptions, this can reduce your overall tax liability and increase your take-home pay.
What is the federal exemption for 2024?
The personal exemption for 2024 remains at $0 (eliminating the personal exemption was part of the Tax Cuts and Jobs Act of 2017 (TCJA).
To claim exempt, write EXEMPT under line 4c. You may claim EXEMPT from withholding if: o Last year you had a right to a full refund of All federal tax income and o This year you expect a full refund of ALL federal income tax. NOTE: if you claim EXEMPT you must complete a new W-4 annually in February.
Municipal Money Market Funds primarily invest in short-term municipal money market securities issued by states, local governments, and other municipal agencies. Municipal MMFs pay interest that is generally exempt from federal income tax.
FMOXX - Fidelity ® Tax-Exempt Money Market Fund | Fidelity Investments.
Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.
Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. Savings Bond interest may also be free from federal income taxes.
Exempt income includes things like distributions from some retirement accounts, gifts under a certain amount, certain benefits, and private insurance plans.
| Fund | Yield | Net expense ratio |
|---|---|---|
| Vanguard Federal Money Market Fund (VMFXX) | 5.29% | 0.11% |
| Schwab Value Advantage Money Fund Investor Shares (SWVXX) | 5.14% | 0.34% |
| Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX) | 5.3% | 0.10% |
| Vanguard Treasury Money Market Fund (VUSXX) | 5.29% | 0.90% |
- Western Asset Select Tax Free Reserves. ...
- Schwab California Municipal Money Fund. ...
- Victory Tax Exempt Money Market Fund (Formerly USAA Tax Exempt Money Market Fund) ...
- Vanguard California Municipal Money Market Fund. ...
- Vanguard New York Municipal Money Market Fund. ...
- Schwab AMT Tax-Free Money Fund.
What is the difference between a money market fund and a money market account?
Money market accounts offer easier access to your money and don't require an investment account. Many money market accounts earn lower returns than money market funds. Money market funds earn higher returns and can deliver tax-free earnings, but they carry more risk.
Certificates of deposit (CDs)
If you withdraw the money before the CD matures, expect to pay a penalty. Depending on the size of the CD, you can earn a higher APY than you would with a savings account or money market account.
Key takeaways
They may come with the ability to pay bills, write checks and make debit card purchases. Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
