If i am in a 25% tax bracket, is it better to get a tax exempt money market or a taxable money market?
July 25th, 2010
I use Vangaurd Tax Exempt money market but have seen Ford’s taxable money market
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The best way to answer this question is to use an example. If you invest $1,000 with a taxable 5% annual interest you would have a gross of $50, but a net after tax of net of $37.50 (given your stated marginal tax rate of 25%) ($50 X 25%= 12.50 tax)
If you put the same $1,000 in a none taxable annual interest rate of anything greater than 3.75% would give you a net gain greater than the taxable fund ( 4% non taxable rate = $40 minus $0 tax = $40).
You need to compare the yields and the state taxes if any. Fidelity CA Muni Money Market Fund has a 7 day yield of 3.16%/yr. Fidelity Cash Reserve Fund (a taxable money market fund) has a 7 day yield of 4.98%/yr. After federal tax of 25% 4.98% is worth 3.735%. If you live in CA you would also pay CA income tax further lowering the 3.735% yield (but not to 3.16%). In this case, the taxable momey market fund is better.
It depends on how much higher the taxable money market is paying than the tax-exempt one. If the tax-exempt one is paying over 75% of the rate the taxable one is paying, then you are most likely ahead going with the tax-exempt fund.