Tax-free money market funds

[disneysteve]

I have a tax-free money market fund with Wells Fargo. Years ago, I got it because at the time, it paid a much better interest rate than taxable accounts. Then, as interest rates changed, the opposite became true and the taxable accounts were outperforming the tax-free account, so I took out all but the minimum deposit needed to keep the account open.

I just reviewed my quarterly statement from the tax-free fund and the 7-day current yield as of Friday was 4.41%. And remember, that is tax-free, so in the 25% tax bracket, that is equivalent to a taxable yield of 5.88%, about double what the best taxable MMAs are now paying. My taxable MMA is at 2.47%. ING is at 2.75%.

So if you are looking to maximize the earnings on your EF and other cash holdings, I'd suggest looking into tax-free money market accounts. I'm going to draw down my taxable account and move the money over to my tax-free account. I'll more than double my interest rate in the process.

[m3racer]

Thanks for the heads up!

[scfr]

For anyone interested, here is a calculator for calculating the "taxable equivalent yield" (or TEY):

Individual Investors - Taxable Equivalent Yield Calculator

disneysteve - May I ask if that fund is state-specific and if it is FDIC-insured?

[disneysteve]

disneysteve - May I ask if that fund is state-specific and if it is FDIC-insured?

It is NOT state-specific and it is NOT FDIC-insured.

It is SXFXX, formerly one of the Strong family of funds which was taken over by Wells Fargo a couple of years ago.

[MYOM]

The only thing I have to add Steve is that a 25% tax bracket starts at $65,100 of taxable income for those married filing jointly.

I would call the fund company to make sure that the $4.41% yield is tax exempt and that it is a tax free money market account. That yield seems a bit high to me. Only Public Purpose Muni's are tax free.

Dan Clemons

[maat55]

Steve, do you feel safe in this investment? It sounds like a good place for my EF.

[disneysteve]

Here is the info page for the fund I'm in:
Municipal Money Market Fund

I am not promoting or recommending this specific fund. I just posted to point out that looking into a tax-free fund may make sense for some of you at this point.

maat, I've been in this fund since 1995. I feel perfectly safe there.

Dan, it is a Federal tax-free municipal money market fund. From the page I linked above:

OBJECTIVE | The Municipal Money Market Fund seeks current income exempt from federal income tax, while preserving capital and liquidity.

PRINCIPAL STRATEGIES | We actively manage a portfolio of high-quality, short-term municipal obligations that are issued by or on behalf of states, territories and possessions of the U.S. or their political subdivisions and financing authorities. These investments may have fixed, floating, or variable rates of interest. We will only purchase First Tier securities We may invest 25% or more of the Fund's total assets in industrial development bonds and in participation interests in these securities.

We invest principally in municipal obligations that pay interest exempt from federal income tax, but not necessarily federal AMT. The Fund attempts to invest exclusively in these securities however, it is possible that the Fund may invest up to 20% of its net assets in high-quality, short-term money market instruments that pay interest subject to federal income tax.