Using the Vanguard Tax-Exempt Money Market Funds As A High Yield Checkings and Savings Account

I used to rate chase, which is opening bank accounts at the places that give me the highest interest rate, but I have stopped because opening too many accounts is just very unmanageable. Instead, I have funneled all of my cash into the Vanguard California Tax-Exempt Money Market Fund (VCTXX). Currently this fund is yielding 3.58%, which doesn’t sound as high as the yields of a lot of online banks, but the yield is completely tax free. For my fubby and I, because our top federal tax rate is 28% and our top state tax rate is 9.3% the yield on VCTXX calculates to about 5.71% pre-tax. I calculated it like this: pretax yield * (1 - 0.28 - 0.093) = 3.58 and therefore 3.58/0.627 = 5.71. Now 5.71% is very competitive against most online banks. Taking into consideration that I really trust Vanguard as a company I have put a large amount of cash in this fund. Another bonus feature of this fund is that it allows free check writing. The checks are free if you request them and they’re payable from Wachovia Bank. The only restriction is that the checks are only valid if the amount payable is more than $250. This is not a big deal since I only write checks for fairly large things. Recently I paid my wedding reception hall with a check on this fund with no problems. I can also use the checks for rent while earning interest.

This fund is definitely not for everyone because it is more beneficial for people in the higher tax brackets. Also, it’s unlike a savings account because it is not FDIC insured. It’s like a mutual fund, and could possibly lose value. So you have to do a tax equivalence yield calculation like I did to see if these funds are worth it for you. Vanguard also has tax-exempt money market funds in other states including New Jersey, New York, Ohio, and Pennsylvania. All of these state specific money market funds are exempt from federal and state income taxes. There is also a national tax exempt fund that provides interest that’s federal tax free. The California fund provides the best tax equivalent yield because our state income taxes are so high.

Anyway, a lot of the Vanguard money market funds are worth checking out. They have great yields and it’s quite easy to pull money out or exchange into other Vanguard funds. Vanguard also has an excellent reputation and great customer service.

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