Should you be in a Tax Free Money Market Fund?
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During these challenging financial times, it requires a quick thinking and patient individual to be able to make the most of money, when money is so hard to come by. It’s also very important to put your money in as many tax-free places as possible, that’s why thinking about a tax free money market fund is the right approach to take for sheltering some of that hard-earned cash.
All you have to do is shop around and do some basic research and you’ll find where the tax-free opportunities live. The Wall Street Journal is an excellent resource for finding trends and recommendations on where to sock away your hard-earned money. A hot tip now is to look at Vanguard’s ‘Tax-Exempt Money Market fund’ (VMSXX). This fund is currently pulling a 5.84% yield, which is way above the money market averages. This is especially useful if you find yourself in the 25% tax bracket, turns out this fund will be the equivalent of a taxable 7.7% APY fund.
Additional things to look at are tax-free municipal bonds. These are usually in the form of debt securities that are issued by a state or local government or an entity of the government and the cash raised by offering these securities goes toward building stadiums, schools, roads or other public projects. These bonds are usually offered on a tax-free status.
T. Rowe Price is another great resource to check with for more information on tax-free municipal funds. They have a number of options to choose from categories in National Tax-Free Bond Funds, National Tax-Free Money Market Funds, State Tax-Free Bond Funds and State Tax-Free Money Market Funds. One example of a National Tax Free Money Market Fund is the Summit Municipal Money Market Fund which provides preservation of capital as well as liquidity and exempt from federal income taxes. It’s really intended for the individual who’s looking for a tax-free shelter that’s secure, stable and highly accessible and deems those as more important that a large return.
Bankrate.com offers a good list of competitive non-taxable money market mutual funds to choose from, listing a current top-10 funds including each fund’s 7-day effective yield, minimum investment and minimal additional investment required. Earnings of course are not subject to tax, but the investor should determine on his own, given the investor’s tax bracket, if the lower yield on the tax-free funds exceed the estimated after-tax return on a taxable fund, but a good rule to go with is that tax-free money market funds make the most sense to investors in higher (above 25%) tax brackets.
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