Using a Money Market account for savings?

[AJSimon]

Is there any reason (or any downsides) to using VMFXX (Vanguard Federal Money Market) as essentially a sort of HYSA? The yield is currently 5.28%, which beats the Cash Deposit and Cash+ accounts' APY, but I'm unsure of the other differences - will I be taxed on the growth at the same rate?

The minimum investment for VMFXX is $3,000 - but Vanguard says the investment is $0.00 if I use it as a settlement fund. I have both a regular brokerage account and a Roth IRA brokerage account with them - both with VMFXX as settlement funds - so I assume I'm good to go to start depositing money in either one if I have less than $3k?

Basically what do I need to keep in mind here?

[srblanco7]

The only “downside” that I’m aware of is that VMFXX is not FDIC insured. I believe the earnings from VMFXX are interest income (same as HYSA), with the note that since VMFXX invests quite a bit in federal short term debt, the earning (or a portion thereof) may be exempt from state income taxes.

I think you’d deposit in you brokerage account settlement fund if your intent is similar to a HYSA. I think your putting the money in your Roth settlement account would be a Roth contribution.

[disneysteve]

The main difference is the lack of FDIC insurance. Other than that, no worries. I currently have probably $90,000 in there. I use it as my cash account to cover our spending throughout the year. It’s easy to transfer to my bank account.

The other difference is the income paid is a dividend rather than interest.

[AJSimon]

The main difference is the lack of FDIC insurance. Other than that, no worries. I currently have probably $90,000 in there. I use it as my cash account to cover our spending throughout the year. It’s easy to transfer to my bank account.

The other difference is the income paid is a dividend rather than interest.

For tax purposes, is the growth treated any differently than a regular brokerage account? Meaning, if I invest in a basic brokerage account and pull the money back out within a year, I'm taxed on the growth at the short term capital gains rate, but if I leave it in longer than a year, it's the lower long-term capital gains rate, Same deal with growth in a MM account?

[disneysteve]

For tax purposes, is the growth treated any differently than a regular brokerage account? Meaning, if I invest in a basic brokerage account and pull the money back out within a year, I'm taxed on the growth at the short term capital gains rate, but if I leave it in longer than a year, it's the lower long-term capital gains rate, Same deal with growth in a MM account?

It's not the same. There's no growth or capital gains in the money market. The share price is always $1.00.

[kork13]

For tax purposes, is the growth treated any differently than a regular brokerage account? Meaning, if I invest in a basic brokerage account and pull the money back out within a year, I'm taxed on the growth at the short term capital gains rate, but if I leave it in longer than a year, it's the lower long-term capital gains rate, Same deal with growth in a MM account?

MM accounts earn interest, not capital gains. It's taxed as interest (normal income), little different than what you get from your bank .... with the caveat srblanco mentioned -- if the bonds held by the MM are tax exempt by states or something, then you do get those benefits. No, they aren't FDIC-insured, but it's nearly as good ... when MM's "broke the buck" back in Sep'08, it was nearly its own minor catastrophe. As a direct result, the US Treasury quickly flooded the market with new paper to stabilize the money markets. So while it's possible for losses, it's exceptionally rare & likely to be quickly corrected.

MM is a perfectly good option to use as a savings account. I personally use it as a secondary savings account, one that is less likely to be tapped than our primary savings account (co-located at a bank with our checking), which I sometimes use to level out our checking account during high-expense months. At the same time, it also serves nicely as dry powder for investing, if something comes up that presents an attractive investment opportunity (market slump, or whatever). Having it within my brokerage account means I can purchase investments immediately, when desired.

[disneysteve]

MM accounts earn interest, not capital gains. It's taxed as interest (normal income), little different than what you get from your bank

Just to clarify, the money market fund actually pays dividends, not interest. At least VMFXX does. But dividends are also taxed as ordinary income just like interest so it makes no substantive difference.