Taxable Vs. Nontaxable Money Market Funds

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    Background

    • Money market funds invest mostly in high-quality short-term securities from the government and government agencies. Nontaxable money market funds invest in tax-exempt municipal bonds.

    Uses

    • Money market funds are generally considered a place to park cash for a short period of time, rather than a long-term investment.

    Tax-Equivalent Yield

    • To determine if you would make more money with a taxable or nontaxable money market fund, calculate your tax-equivalent yield for a nontaxable money market fund with this formula: Tax-equivalent yield equals tax-free yield divided by (1 minus your federal tax bracket).

    Considerations

    • Unlike money market accounts offered by banks, money market funds are not insured by the Federal Deposit Insurance Corp., but they are regulated and are generally considered safe investments.

    Expert Insight

    • Depending on the types of bonds in the fund, part of the income earned from tax-exempt funds may be subject to the federal alternative minimum tax.

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