I am trying to choose between a taxable or tax-free money market fund for my emergency money.
What are the high level guidelines to choose one over the other? I know that the tax-free typically has lower return, and that I need to do the actual calculation to verify which one is more advantageous.

Is there anything else to consider?

3 Answers 3


The value to you of a tax free fund is going to depend largely on your current marginal tax bracket.

For example if you had a regular MM that was paying 1% and it was taxable, then your net off that one percent would be

0.72% if you are in the 28% tax bracket
0.85% if you are in the 15% tax bracket

If the tax free MM fund pays .75% then you would be a tiny bit ahead using it, if you are in the 28% bracket, but you would be behind if you are in anything lower than 25%

The primary market (IMHO) for Tax Free money market funds is for high wealth individuals who are in the 33 OR 35 percent brackets

  • You must live in a low tax state! In a place like New York, add on at least another 6% for most people, plus another 3-4% for New York City residents! Jun 13, 2011 at 12:31
  • Good point, I should have mentioned to put in the state tax as well if there is one and the fund is tax except at the state level as well.. There are about 20% of the states with no income tax at all, and then others where it's nearly 10 percent if you make anything at all, so that is a factor to be considered, PROVIDED that the MM Fund in question is also tax free at the state level. In some cases tax free MM funds only focus on federal tax, and may thus be investing in instruments which are not tax free for your state. Jun 15, 2011 at 19:34

Generally speaking, an emergency fund's primary purpose for being is to be available in an emergency. Income generation is a distant second.

As long as you have immediate access to it via checks or an atm card, you're doing ok. If you live in a high-tax state or a place like New York City with federal, state and local income tax, I'd probably err on the side of the municipal fund for your state.


Tax-free money funds invest in municipal bonds, so you'll want to factor in the likelihood that the issuing government (state, local, etc.) will stiff its bondholders.

  • Huh? That really isn't a consideration for liquid money. State/municipal governments don't default on short-term obligations. Jun 13, 2011 at 12:19
  • Agreed, also unless the fund is particular to a given state, they would generally tend to avoid any state with marginal ratings or serious fiscal management issues. If you live in such a state who might for example be prone to printing IUO's instead of paying obligations in greenbacks, (cough California cough) Then you may want to consider that. Do bear in mind however that firstly states are not allowed to go bankrupt, and secondly most would do whatever they can to avoid defaulting on bonds since they don't want to lose access to credit markets. Jun 15, 2011 at 19:40

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