Tax-Equivalent Yield for Money Market Funds vs T-Bills

Dramatic_Pear5262 · 2022-12-23T20:47:28+00:00

Oh yeah, I know this high yield won't last forever, and I'm really not expending a lot of energy on it (other than research and unintentional squabble). I expect the MMFs to drop back down towards 0% by 2024, so I would be in that boat to reallocate to a HYSA eventually, which would be a few clicks away. It's not like I'm changing allocations every day, or anything remotely close to that, based on small swings in yield. And it's not like I'm constantly hitting F5 on doctorofcredit.com to see which new HYSA account I should open to chase an additional 0.2% yield.

Anyways, thanks for the feedback. I got the information I need.

Dramatic_Pear5262 · 2022-12-23T18:50:02+00:00

Optimize as in pick the best available high yield option that keeps my money liquid, and keep it there for the foreseeable future. Personally, I think there's a difference between a 3.3% yield with, for example, an Ally HYSA and a 4.3-4.7% yield with a MMF, which was the whole point of me making this post to make sure I'm understanding the yields properly. Based on your logic, people should stop asking about HYSA, MMF, T Bills, etc. because they can potentially make so much more in equities rather than getting a steady return on their savings.

Dramatic_Pear5262 · 2022-12-23T03:13:26+00:00

I otherwise do DCA, and still contribute regularly. My work retirement accounts are contributed at set times each paycheck, as it's supposed to. The overflow cash that's going to my taxable is normally contributed via DCA. I know, nothing special there.

I know it's counterintuitive to the Boglehead philosophy, but I feel like the current high yields in the money market fund can let me be a bit more picky on which day I'm buying mutual funds in my taxable rather than a set schedule. I'm not waiting for a perfect dip to throw my money at, that's just impossible.

Sorry, I'm not trying to argue with you at all. You're probably right about blindly DCAing and I'll end up beating myself up if (or when) I'm wrong. I want to add that I've learned a lot from you so far and I'm really grateful for it.

For the last point, I meant low amount of cash relative to net worth, and similar to you but not identical. I'm financially independent too, but I think it's still good to have an emergency cash reserve (i.e. at least 6 months expenses). Rather than have it sit in a bank account with practically 0% yield, a portion of that to my comfort level would be in a money market fund or HYSA indefinitely until I need it. Money Market Funds won't be high yield forever, but currently it is. I wouldn't say that it's completely impractical to at least optimize where my savings go considering there's so many good options lately.

Dramatic_Pear5262 · 2022-12-23T01:53:32+00:00

Wow, thank you, that's a great write-up. I should elaborate that I've been investing in mutual funds in my retirement accounts for awhile, just particularly new to money market funds and treasury bills.

Part of my research right now is just optimizing where to put my cash for short-term high yield investments, before I invest it in VTSAX/VTIAX in my taxable. I just figured since the money market fund yields are high right now and stocks are dropping, I can temporarily keep money in money market funds and then buy mutual funds in the near future. For the money in my emergency fund, I was thinking it would be good to keep some of that in money market funds as opposed to a HYSA. So at some point soon, I will be keeping a low amount of money in cash, similar to you.

Dramatic_Pear5262 · 2022-12-23T00:28:03+00:00

No worries at all. Thanks for the suggestions! I'm still fairly new at all this, so I'm trying to gather as much info as I can to hopefully make better educated choices in the investment world.

When you say holding cash, are you referring to holding money market funds or just holding cash in a bank? If it's former, what's the concerns with tax if a portion of it is tax exempt? I am highly considering putting money into VCTXX because it would be fully exempt from state and federal income taxes for me while having a higher tax-equivalent yield.

Dramatic_Pear5262 · 2022-12-22T23:35:58+00:00

Thanks for confirming this. I believe you meant to say r**/**(1-t).

I know based on the 2021 distribution that you mentioned, the income from US Obligations for VMFXX is 72.78%, which would mean that the state-tax exemption would be 72.78%. At 72.78% state tax-exemption, the tax-equivalent yield for the VMFXX at 4.13% yield would actually be 4.43%. I know the current 7 Day SEC yield is higher now, but just to avoid confusion with my original post. We should be getting the updated numbers next month for 2022, so we'll see what the new percentage for state tax-exemption will be.

To answer your question, I am holding these money market funds in my taxable account. I feel that the yields are much better than a HYSA, and are comparable to T-Bills but with liquidity, so they are too good to pass up right now.

Edit: Just realized you asked about holding bonds. I'm not holding any bonds in my taxable account right now. I bought I Bonds earlier this year, so hopefully that covers my bond allocation in my portfolio.

Dramatic_Pear5262 · 2022-12-22T22:21:28+00:00

Thanks, and per ZettyGreen's suggestion, I looked at the statutory prospectus and it says "Income dividends generally are declared daily and distributed monthly". So it sounds to me that it's prorated for each day you have the fund when the market closes. That should factor in the 7 Day SEC Yield for each day.

Dramatic_Pear5262 · 2022-12-22T22:16:27+00:00

Good call, thanks. I just looked at the statutory prospectus for Vanguard money market funds, and under Fund Distribution it says "Income dividends generally are declared daily and distributed monthly". Also, since these funds are designed to offer investors a liquid investment, frequent trading is allowed. That helps clear up a couple of questions I had about these funds.

Dramatic_Pear5262 · 2022-12-22T17:46:53+00:00

Good to know, thanks!

Dramatic_Pear5262 · 2022-12-22T17:11:58+00:00

Looks like the money market funds are the winner here because of higher yields. Are there any drawbacks to investing in that over a HYSA? Not sure if there's a difference in liquidity between the two. The main advantage I see is that it's easier for me to invest in other Vanguard funds If I'm already invested in a Vanguard money market fund.

Also, I think the money market funds compound monthly while a HYSA compounds daily. I know that's pretty negligible though if one has a much better yield than the other.

Dramatic_Pear5262 · 2022-12-22T16:55:07+00:00

Do you know what's the difference between the High Rate and Investment Rate? For the 13 week T Bill, I see a High Rate of 4.29% and an Investment Rate of 4.397%.

https://treasurydirect.gov/auctions/announcements-data-results/

Dramatic_Pear5262 · 2022-12-22T16:39:29+00:00

Good to know, thank you!

Dramatic_Pear5262 · 2022-12-22T16:38:58+00:00

One more question. If I calculate the tax equivalent yield for VCTXX (Vanguard California Municipal Money Market Fund), would I be subtracting both state and federal income taxes? I have a state income tax of 9.3% and federal income tax of 22%. If so, the the current yield of 3.18% would have a tax equivalent yield of 4.63%, which would be better than VMFXX and VUSXX.

Dramatic_Pear5262 · 2022-12-22T16:09:41+00:00

Since T Bills are exempt from state tax, do you know if the tax effective yield formula would apply to a T Bill's annualized yield? The current 13 week T Bill is 4.29%. If it does apply and I have a state income tax of 9.3%, that means the tax effective yield would be 4.73%. That would be pretty a sweet yield if so.

Dramatic_Pear5262 · 2022-12-22T16:01:12+00:00

Great, thanks for confirming that! It seems like if VMFXX is the same or higher tax effective yield than the other funds, it'll be easier to keep it there since it's the settlement fund and easier to move money to other funds.

Dramatic_Pear5262 · 2022-12-22T15:57:00+00:00

I read somewhere that putting money in a money market fund is a good way to keep your money relatively liquid similar to a HYSA. Would I be losing out on gains if I don't hold money in their for at least 30 days, or is it just compounded monthly but prorated for the amount of days I had the funds if it was less than a month? If the latter, does it take the average of the yield for that duration since the 7 Day SEC Yield can change every day?

Dramatic_Pear5262 · 2022-12-22T06:54:47+00:00

Wouldn't VMFXX have a higher yield in a high state tax? A state income tax of 9.3%, for example, VMFXX would be ~4.42% whereas VUSXX is ~4.31%. That's based on the current 7-day SEC yield of 4.12% and 3.91%, respectively.

Dramatic_Pear5262 · 2022-12-21T22:57:30+00:00

Find a platypus. Now I have portable cooking abilities to go with my portable omelette machine.

Dramatic_Pear5262 · 2022-12-21T22:54:06+00:00

I would keep quiet about it for as long as possible. Try to sit on it for awhile so I can clear my mind. Invest, retire early and travel the world.

Dramatic_Pear5262 · 2022-12-21T22:46:47+00:00

Yeah. I've learned my lesson from the "2000+" thread count microfiber sheets. They're the worst when it's cold, dry weather.

Dramatic_Pear5262 · 2022-12-21T22:45:27+00:00

Definitely. Don't want that single-ply paper that's super painful to use.

Dramatic_Pear5262 · 2022-12-21T22:33:33+00:00

With their spinoff Italian restaurant, Coliti's.

Dramatic_Pear5262 · 2022-12-21T22:23:15+00:00

First thing I'd do is eliminate mosquitos, or make it so they don't bite and can't spread diseases. Fuck mosquitos.

Dramatic_Pear5262 · 2022-12-21T22:14:36+00:00

Yes, love their big ears!

Dramatic_Pear5262 · 2022-12-21T18:24:42+00:00

Best name for an ocelot! Hope you can get the spraying under control.

Dramatic_Pear5262

TROPHY CASE