A taxable money market fund is a type of mutual fund that invests in short-term, high-quality, interest-bearing instruments—like U.S. Treasury bills, certificates of deposit (CDs), and commercial paper issued by corporations. These funds are considered very low risk and are typically used by investors who want a safe place to park their cash while earning a modest return.
The term taxable refers to the fact that the income you earn from these funds is generally subject to federal—and sometimes state—income taxes.
Let’s break it down using a real-world example: Vanguard Treasury Money Market Fund (VUSXX).
What is VUSXX?
Vanguard Treasury Money Market Fund (VUSXX) is a popular taxable money market fund managed by Vanguard. As of 2025, VUSXX primarily holds U.S. Treasury bills and other government securities with short durations, typically under one year.
Here’s what makes VUSXX stand out:
- Stable value: The share price is designed to stay at $1 per share.
- Liquidity: You can withdraw funds easily without penalty.
- Yield: VUSXX’s SEC yield has recently hovered around 5%, although yields change with interest rates.
- Low risk: Because it holds U.S. government-backed debt, the risk of default is extremely low.
Why is VUSXX Considered Taxable?
Although VUSXX invests in U.S. Treasury securities—whose interest is exempt from state income taxes—the income is not exempt from federal taxes. That’s why it’s categorized as a taxable money market fund.
This differs from tax-exempt money market funds, which invest in municipal bonds and may offer income that is free from both federal and sometimes state taxes. However, tax-exempt funds often yield less than taxable ones like VUSXX.
Who Should Consider VUSXX?
VUSXX is especially useful for:
- Short-term savers: People who want to keep their money accessible but still earn interest.
- Emergency fund holders: It’s a good place to stash your emergency fund without taking market risk.
- Investors seeking stability: Those who are in between investments or need to park cash temporarily.
- Tax-conscious investors: Residents of high-tax states may benefit from the state tax exemption on U.S. Treasury interest.
That said, if you’re in a high federal tax bracket, you may want to compare the after-tax yield of VUSXX with tax-exempt alternatives.
How Is Income from VUSXX Reported?
Income from VUSXX is reported on a Form 1099-INT and must be included in your taxable income on your federal return. The fund will also break out how much of the income came from U.S. Treasury obligations, which may be exempt from your state income tax depending on where you live.
Alternatives to VUSXX
If you want to avoid paying federal income tax on interest earned, consider:
- Municipal money market funds: These are tax-exempt and ideal for those in high tax brackets.
- I Bonds: Issued by the U.S. Treasury, they offer tax-deferred interest that may also be exempt from state and local taxes.
- Treasury bills held directly: Buying T-bills through TreasuryDirect or a brokerage account avoids fund fees altogether.
However, many investors prefer VUSXX for its simplicity, daily liquidity, and automatic reinvestment features.
Final Thoughts
A taxable money market fund like VUSXX offers a safe, liquid place to store your cash while earning a modest return. It’s a solid choice for people who want to avoid market volatility and still earn more than they would in a typical bank savings account.
Just keep in mind that the income is federally taxable. If you’re in a high tax bracket, it’s worth comparing the after-tax yield to other options. Still, for many investors, the blend of safety, yield, and convenience makes VUSXX an attractive place to hold short-term cash.
Winchell House 
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