Do you get taxed on money market fund?
Money market funds are divided into two categories: taxable and tax-free. If you're buying a taxable fund, any returns from the fund are generally subject to regular state and federal taxes.
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.
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.
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.
Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
- Investing in a tax-deferred account such as a traditional individual retirement account or a 401(k).
- Stashing money in a tax-exempt account such as a Roth 401(k) or a Roth IRA.
“Interest income from CDs and MMAs is typically taxable as ordinary income, unless the funds are invested in a municipal bond money market fund,” says certified financial planner Bruce Primeau at Summit Wealth Management. These municipal bonds are typically tax-exempt both at the federal and state level.
- 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.
- Your Money Could Earn More Elsewhere. High-risk investments could provide better returns in the long run. ...
- Your Funds Are Uninsured. If you open a CD or a checking, savings or money market account from a bank, your funds are FDIC-insured. ...
- You Can Expect Fees.
- Advantages of money market accounts often include high yields, liquidity and federal insurance for your funds. ...
- Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
How is a money market fund taxed?
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.
Currently, money market funds pay between 4.47% and 4.87% in interest. With that, you can earn between $447 to $487 in interest on $10,000 each year. Certificates of deposit (CDs). CDs are offered by financial institutions for set periods of time.
How safe are money market funds? There is little risk associated with money market funds. The U.S. Securities and Exchange Commission (SEC) mandates that only the highest-credit-rated securities are available in money market funds.
As of April 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
How much is too much savings? Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind. Anything over $250,000 in savings may not be protected in the rare event that your bank fails.
A money market account is a type of account offered by banks and credit unions. Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.
Interest earned on certain U.S. savings bonds, such as Series EE and Series I bonds, is exempt from state and local income taxes. Government bonds such as Series HH bonds and Treasury Inflation-Protected Securities (TIPS) may also be tax-exempt. Interest earned on 529 plans is usually exempt from federal taxes.
There is no specific limit or threshold that would cause the IRS to tax it. That being said, ant cash deposits of $10,000 or more would be reported by the bank in a Currency Transaction Report (CTR) to FinCEN, an arm of the Treasury Department.
Tax-Advantaged Savings Accounts
The major tax-advantaged savings account options are: Roth Individual Retirement Account (IRA) or Roth 401(k): Interest earned in a Roth account is not taxed until it is withdrawn. And, if you are older than age 59 ½, you will owe no income taxes at all on the interest.
| Top Nationwide Rate (APY) | Balance at Maturity | |
|---|---|---|
| 6 months | 5.76% | $ 10,288 |
| 1 year | 6.18% | $ 10,618 |
| 18 months | 5.80% | $ 10,887 |
| 2 year | 5.60% | $ 11,151 |
What is better than a money market account?
Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time. To make the best choice, consider your financial goals and situation.
Both CDs and money market accounts are safe investments. They typically include FDIC insurance and don't involve the purchase of securities that may fluctuate in value. The only situation in which your investment could be at risk is if the financial institution at which you open the account declares bankruptcy.
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
Because you earn higher interest rates than with a traditional savings account, a money market account can be a great choice to set aside some emergency cash or start building your savings. And unlike a traditional savings account, you have more options for withdrawing your money when you want it.
You cannot lose the balance of a money market account, although penalty fees may be charged for not meeting balance and withdrawal requirements.
