Do money market funds pay qualified dividends?
Money market dividends also do not qualify and are reported as interest income. The required holding period for the stock has been met.
- Domestic Stock Funds.
- International/Global Stock and Bond Funds.
- Taxable Bond and Money Market Funds.
- Tax-Free Bond and Money Market Funds.
- Retirement, Spectrum, and Target Funds.
- Exchange-Traded Funds (ETFs)
MMFs declare dividends daily, though they are only paid out monthly. If you totally cash in your MMF in the middle of the month, you'll receive the cumulative declared dividends from the 1st of the month to when you sold out.
To be a qualified dividend, the payout must be made by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.
The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.
To qualify for the qualified dividend rate, the payee must own the stock for a long enough time, generally 60 days for common stock and 90 days for preferred stock. To qualify for the qualified dividend rate, the dividend must also be paid by a corporation in the U.S. or with certain ties to the U.S.
- Those dividends that did not meet the requirements of a qualified dividend as previously mentioned.
- Capital gains distributions.
- Dividends paid on bank deposits, such as credit unions or savings and loans.
- Dividends from tax-exempt corporations or farmers cooperatives.
Income earned from money market fund interest is taxed as regular income, up to 37% depending on the investor's tax bracket. While some local and state taxes offer breaks on income earned from U.S. Treasury bonds, federal income tax still applies.
Given that much higher return potential, investors should consider automatically reinvesting all their dividends unless: They need the money to cover expenses. They specifically plan to use the money to make other investments, such as by allocating the payments from income stocks to buy growth stocks.
If you own bonds or money markets through a mutual fund or ETF (exchange-traded fund), the interest payments will go to the fund and will then be passed on to you as "interest dividends" (which are treated as interest for tax purposes).
How do you avoid tax on qualified dividends?
Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.
Qualified dividends are a subset of your ordinary dividends. Qualified dividends are taxed at the same tax rate that applies to net long-term capital gains, while non-qualified dividends are taxed at ordinary income rates. It is possible that all of your ordinary dividends are also qualified dividends.
Ordinary dividends are taxed as ordinary income at your regular tax rate, while qualified dividends are taxed at a lower rate, similar to the long-term capital gains tax rate.
If you're looking to earn more interest, a CD usually offers higher rates than a money market account. While rates on both CDs and money market accounts are variable, CDs usually have fixed rates. That means you can lock in a higher interest rate on money that you won't need to access soon.
Money market mutual funds are among the lowest-volatility types of investments. Income generated by a money market fund is either taxable or tax-exempt, depending on the types of securities in which the fund invests in.
Municipal money market funds invest primarily in short-term, municipal money market securities issued by states, local governments, and other municipal agencies. They pay interest that is generally exempt from federal income tax.
Dividends are taxable regardless of whether you take them in cash or reinvest them in the mutual fund that pays them out. You incur the tax liability in the year in which the dividends are reinvested.
If you had over $1,500 of ordinary dividends or you received ordinary dividends in your name that actually belong to someone else, you must file Schedule B (Form 1040), Interest and Ordinary Dividends. Please refer to the Instructions for Form 1040-NR for specific reporting information when filing Form 1040-NR.
Some but not all equity ETFs pay dividends to their shareholders. Not all ETF dividends are taxed the same; they are broken down into qualified and unqualified dividends. Qualified dividends are taxed between 0% and 20%. Unqualified dividends are taxed from 10% to 37%.
It is possible to achieve financial freedom by living off dividends forever. That isn't to say it's easy, but it's possible. Those starting from nothing admittedly have a hard road to retirement-enabling passive income.
What type of dividends are not taxable?
Nontaxable dividends are dividends from a mutual fund or some other regulated investment company that are not subject to taxes. These funds are often not taxed because they invest in municipal or other tax-exempt securities.
| Dividend Tax Rate, 2022 | ||
|---|---|---|
| Filing Status | 0% Tax Rate | 20% Tax Rate |
| Single | $0 to $41,675 | $459,751 or more |
| Married Filing Jointly | $0 to $83,350 | $517,201 or more |
| Married Filing Separately | $0 to $41,675 | $258,601 or more |
- Limited transactions. Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn't the best account for regular banking. ...
- Deposit and balance requirements. ...
- Fees. ...
- High interest rates. ...
- Flexible access. ...
- Federal insurance.
Risk: With a money market account, interest rates may fluctuate, but your account won't lose value. By contrast, money market funds have some risk; you could lose money if market conditions change. Fees: Money market accounts usually come with monthly fees, which may be waived if you meet certain balance requirements.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
