Municipal money market funds: when tax-exempt beats taxable
National and single-state tax-exempt funds as filed, and the arithmetic that decides whether their lower yield leaves you more.
Compiled by Radif Partners · Editorial policy
A municipal money market fund holds short-term debt of states, cities, school districts and public agencies, mostly variable-rate demand notes that the fund can sell back at par on a few days’ notice. Interest on that debt is exempt from regular federal income tax, and the fund passes the exemption to its shareholders. The price of the exemption is a lower yield. In the data behind this site, the 18 national municipal share classes averaged a 7-day yield of 1.96%, the 16 single-state classes 1.99%, and the 160 government classes 3.59%. The municipal average was 55% of the government average. The lower that ratio, the higher the tax rate needed before the exemption pays for itself: at 55%, tax would have to take more than 45% of a taxable dividend. The question for any reader is simple to state: does the tax saved make up for the yield given up? The answer depends on two rates, federal and state, and on whether the fund’s bonds come from your own state.
Tax-equivalent yield of a municipal fund
Example, not your result yet· change a figure to see yours
A fully taxable fund must yield
3.04%
| Municipal fund keeps after tax | 2.16% |
| Taxable fund at the same yield keeps | 1.61% |
Taxable fund assumed fully taxed by your state. A Treasury fund keeps more because its state share is exempt.
National funds and single-state funds
A national fund such as Vanguard Municipal (VMSXX) buys from issuers across the country. Its dividend escapes federal tax, but most states tax the part that comes from other states’ bonds, so for most readers the dividend is federally exempt and state-taxable. Each year the fund publishes the share of its income from each state, and residents of a state with a large share can exempt that slice. This site treats the whole national-fund dividend as state-taxable, the cautious case.
A single-state fund buys only from issuers in one state, usually California, New York, Massachusetts or New Jersey, where both taxes are high enough to justify a dedicated fund. For a resident of that state the dividend is free of both federal and state tax; New York funds also escape New York City tax. For anyone else the single-state fund is a national fund with fewer issuers to choose from. In the data the single-state classes averaged 1.99% and the national ones 1.96%; residents of high-tax states compete for a limited supply of their own state’s short paper, which tends to hold single-state yields down.
A worked case in California
Take $100,000 held by a single Californian, and compare three funds: the California municipal fund VCTXX (2.10% as filed), the national municipal fund VMSXX (2.27%) and the Treasury fund VUSXX (3.89%), whose dividend California does not tax. The after-tax yields at four income levels:
| Taxable income | VCTXX | VMSXX | VUSXX | Keeps most |
|---|---|---|---|---|
| $60,000 | 2.10% | 2.09% | 3.03% | VUSXX |
| $150,000 | 2.10% | 2.06% | 2.96% | VUSXX |
| $300,000 | 2.10% | 2.06% | 2.38% | VUSXX |
| $800,000 | 2.10% | 1.99% | 2.30% | VUSXX |
With the yields filed this year, the Treasury fund keeps the most at 4 of these four incomes: California does not tax its dividend either, and its yield is far higher. The municipal funds close the gap as the federal rate climbs. If municipal yields rise relative to taxable ones, the single-state fund overtakes the Treasury fund first in the top brackets. That is the kind of change the filed data shows month by month.
Taxes the calculators do not model
Some municipal funds hold private activity bonds, whose interest is a preference item for the alternative minimum tax. Since the 2017 tax law raised the exemption, few households pay that tax, but those who do should check the share of AMT income in the fund’s year-end letter. The calculators here also ignore the phase-outs and credits that make a real marginal rate differ from the bracket rate. And municipal funds held in a tax-deferred account waste their exemption: inside an IRA, compare funds on yield alone.
Municipal funds in the data
| Fund | State | 7-day yield | Assets |
|---|---|---|---|
| VMSXX Vanguard Municipal Money Market Fund | National | 2.27% | $19.5 billion |
| SWTXX Schwab Municipal Money Fund | National | 2.17% | $4.8 billion |
| VCTXX Vanguard California Municipal Money Market Fund | CA | 2.10% | $4.4 billion |
| FTEXX Fidelity Municipal Money Market Fund | National | 2.06% | $4.1 billion |
| VYFXX Vanguard New York Municipal Money Market Fund | NY | 2.28% | $3.7 billion |
| FZEXX Fidelity Tax-Exempt Money Market Fund | National | 2.11% | $3.0 billion |
| SWKXX Schwab California Municipal Money Fund | CA | 1.99% | $2.5 billion |
| CAIXX FEDERATED HERMES CALIFORNIA MUNICIPAL CASH TRUST | CA | 2.10% | $2.2 billion |
| FSPXX Fidelity California Municipal Money Market Fund | CA | 1.90% | $2.2 billion |
| FSNXX Fidelity New York Municipal Money Market Fund | NY | 2.04% | $1.8 billion |
| FMSXX Fidelity Massachusetts Municipal Money Market Fund | MA | 1.97% | $1.4 billion |
| SWWXX Schwab AMT Tax-Free Money Fund | National | 2.14% | $1.3 billion |
The twelve largest of the 34 retail municipal share classes, 7-day yields as filed. Vanguard Federal (VMFXX), for comparison, filed 3.88%.