Money market funds don’t have FDIC coverage, but they do offer a useful alternative to savings accounts for liquidity. Although money market funds are considered extremely low-risk investments, some may include slightly more risk than others. Money market funds which invest predominantly in Treasuries are generally deemed to be the safest. Most states do not tax income from a money market fund that was earned on U.S. government obligations such as Treasuries.
Depending on your state of residence and taxable income, the current tax-equivalent yield a of a Treasury MMF probably exceeds the yield of your savings account. As an example, consider VUSXX, the Vanguard Treasury Money Market Fund. As of 1/25/2023, VUSXX had a 7-day SEC yield of 4.26%. Since VUSXX is heavily invested in Treasuries, 100% of its income was derived from U.S. government obligations in tax year 2022 (see: https://www.vanguard.com/pdf/USGOIN_2023.pdf). Assuming that 100% of VUSXX’s income continues to be derived from U.S. government securities in tax year 2023, its state tax-exempt status would be similar to a Treasury Bill. Therefore, we should be able to utilize a taxable-equivalent yield calculator to compare the yield of VUSXX to the approximate yield of a savings account. The technique of the comparison should be similar to the one I previously posted regarding the comparison of the yield of a 6-month T-bill to the yield of a 6-month CD (see: https://www.depositaccounts.com/community/misc/51048-comparing-taxequivalent-yields-6month-tbill-6month-cd-152023.html)
According to the Taxable-Equivalent Yield Calculator available at Fidelity, if your principle state of residence is California, and your estimated taxable income is $59,000, and your federal tax filing status is single, VUSXX at 4.26% has a tax-equivalent yield of a savings account at approximately 4.90%. Changing the estimated taxable income to $118,000 and the federal tax filing status to married filing jointly produces the same tax-equivalent yield of approximately 4.90%. If you change the state to New York and leave all the other variables the same, VUSXX at 4.26% has a tax-equivalent yield of a savings account at approximately 4.67%. Repeating this procedure for Nebraska generates a result of 4.72%. For Missouri the result is 4.63%. For Oregon it’s 4.86%, and for South Carolina it’s 4.73%
All of these results neglect local income tax, and assume that VUSXX and the comparable savings account are held in a taxable account. The Taxable-Equivalent Yield Calculator available at Fidelity expresses yield as the effective annual rate of return in percent.
When comparing funds, be aware not all money market funds labeled as treasury money market funds have 100% of their income earned from U.S. government securities. For example, the Fidelity Treasury Money Market Fund, FZFXX (CUSIP: 316341304), had 29.62% of its income earned from U.S. government securities in 2022 (see page 19 of 22 of the following pdf document: https://institutional.fidelity.com/app/proxy/content?literatureURL=/842885.PDF). Consequently, FZFXX would have a smaller portion of its earned income exempt from state tax.
Three states, California, Connecticut, and New York, exempt income only when a money market fund has met a certain minimum investment in U.S. government securities. VUSXX does meet the minimum investment in U.S. government securities required to exempt state tax in CA, CT, and NY.
