I’ve written before about how money market funds are my preferred ‘savings account’. Personally I’ve been using Vanguard’s default money market fund (VMFXX) and their treasury fund (VUSXX). There are similar fund options from all the other major brokerages like Fidelity and Schwab. Other people like to use ETF’s which invest in U.S. Treasuries such as the SGOV fund.
One of the benefits of holding U.S. Treasuries or treasury funds is they are exempt from state and local taxes which are quite high in some areas of the U.S. (There are also municipal bond funds which are exempt from federal taxes; that’s not the focus of this article.)
It’s worth noting – something I hadn’t really focused on until doing my taxes now – that the state tax savings is only realized if you manually request it. By default the systems will just assume all dividends are taxed. You have to verify what percentage of any given fund is state tax exempt and then manually claim the state tax exemption on that income. For example, if you earned $1,000 in dividends from a given fund which was 52% invested in U.S. Treasuries, then you’d claim $520 of income as exempt from state taxes. If you state and local taxes are 10%, you’ll end up with $52 in tax savings.
If you do your own taxes be sure to compute the state tax savings. If you have an accountant, double check that they caught the savings. It’s probably worth mentioning to the accountant when giving over your tax info that some of the dividends are state tax exempt.
Something we noticed now, with regards to Vanguard, is that they strangely don’t mention the breakdown of the U.S. Treasury portion of the default money market fund (VMFXX) in their 1099-DIV tax form: you’ll see there a full long breakdown on each and every stock and bond fund, including what percentage of the fund is invested in U.S. Treasuries. However, for unknown reasons, they don’t list in the 1099 the breakdown of the default money market funds. An astute accountant might know to look for the tax savings for all the other mutual funds and bond funds, but they are very unlikely to realize the state tax exemption from the VMFXX fund unless you mention it directly.
You can find the breakdown for 2023 in this pdf from Vanguard. For 2023, VMFXX was 49.37% U.S. Treasuries. I found this article from MyMoneyBlog helpful as well for Vanguard and this article for Fidelity and this article for SGOV.
On a related note, it’s worth pointing out that not all states give the tax break for funds which are invested less than 50% in Treasuries. VMFXX, for example, which is 49% Treasuries would be fully taxed on the state level in those states. Most states allow a proportional deduction even on funds which have are low percentage invested in U.S. Treasuries.
