Is VUSXX still the best after-tax option for a low-risk emergency fund?

[u/WorldGuardian1]

I’m currently holding my ~$40K emergency fund in VUSXX (Vanguard Treasury Money Market Fund). I live in Alabama, which exempts U.S. Treasury interest from state income tax, so I benefit from state tax exemptions on the income.

I’m looking to preserve capital and minimize risk. That said, I’m wondering:

Are there any brokered CDs, municipal funds, or other low-risk options that currently outperform VUSXX on an after-tax basis?

Has anyone modeled the tax-equivalent yields for alternatives like VWITX or VWLTX? Any downsides I might be overlooking with VUSXX—aside from rate risk if yields decline?

Appreciate your insights—thanks in advance!

[u/Caudebec39]

Short answer is that VUSXX is very, very good.

There is a longer answer.

I use Vanguard as my broker for Traditional IRA, Roth IRA, brokerage.

From my brokerage account, I can buy US Treasury bills, notes and bonds with maturities from 1-month to 30-years.

There's no fees, commissions or expense ratios.

These Treasury securities have all the characteristics of VUSXX (e.g. also exempt from state tax) except you choose the exact duration, and you own the bond. So you know exactly what you're going to get in terms of payments, directly from the US government into your brokerage account. If yields decline then VUSXX is affected, but these securities give a locked-in rate.

I started buying these securities, because I set aside money for a tuition payment I know I need to make, and so I put those funds into 100% safe investments currently paying about 4.3% (annually). I know when the time comes to make the payment, these securities will have matured and I'll have the money on-hand.

If I actually did need the money ahead of time, Treasury securities may be easily sold in the secondary market, subject to interest rate fluctuation, but on short maturities that's not big concern, and it's apt to be less of a loss than the loss of interest a CD would entail for early withdrawl.

[u/Chill_Will83 → u/Caudebec39]

Locking in a guaranteed 4.3% is pretty solid.

[u/Not_FinancialAdvice → u/Caudebec39]

I was doing this through Treasurydirect. My biggest issue was that the 1mo treasuries would mature and I'd need to wait a week for the next auction. Sure I could have set it to auto-reinvest, but this is money where I need it irregularly, so if I miss cancelling the auto-reinvest date it's an issue. That means I miss a week or two of interest sometimes because I have very substantial responsibilities (I care for some elderly family with very serious disease).

[u/Caudebec39 → u/Not_FinancialAdvice]

If I miss a reinvest date, then at Vanguard my bond paying 4.3% matures and reverts to my settlement fund paying about 3.8%, until I get around to buying another security.

This is better than Treasury Direct, where you describe missing out on a couple weeks of interest entirely.

With Vanguard if I pay very close attention to the maturity date of the old bond, and the settlement date of the new bond i can time it so one pays out just as the other is settled.

But this fancy footwork won't appeal to you as getting it right is even trickier than fiddling with the auto-reinvest!

[u/CollectionLeft4538 → u/Caudebec39]

We have Vanguard I did some Treasury investing same with the settlement date. It was hard to find shorter durations. Everything you have to do manually not automatically. So to keep easy with all the IRAs picked the VMFXX for the settlement accounts.

[u/GoodOmens → u/Caudebec39]

I’d caution on treasuries unless you ladder. Sell restrictions can happen (like when China was offloading them earlier this year), leaving you unable to sell on the secondary unless you have 100k or sometimes 300k in treasuries to sell at once.

[u/Martery → u/GoodOmens]

Sell restrictions

There were no sell restrictions - you need to take a look into the market depth in the secondary market. Maybe at the ask price, someone was only offering $100k/$300k at a specific price. Zoom down and maybe there's a fill at a lower price point. Or, offer to sell at your specified price point and see if someone takes it. I,E - the 10/21 bill has a min amount of 1,100 at a YTM of 4.339%, I need to go to a yield of 4.323% until I get one in quantities of 1-25.

The bond market is not as liquid compared to the stock market - you'll find larger bid/ask spreads. Which is why most people tend to stick with say, SGOV/USFR/etc. They pay the 9 point expense ratio for the convenience of not having to handle this.

[u/GoodOmens → u/Martery]

I’ve seen it at Merrill, Vanguard, and at Fidelity. Even going into the order book the restrictions had remain. Usual explanations are some sort of liquidity problem so the brokers put in the restrictions to calm the market (like the before mentioned China offload).

Rare but if your intent is to liquidate early I’d ensure you have a sizable amount (like 100k+) or break it up in a ladder or some in a mmf to tie you over until the liquidity passes or your bill matures.

Some prior examples: https://www.bogleheads.org/forum/viewtopic.php?t=408773&start=50

https://www.bogleheads.org/forum/viewtopic.php?t=455703

[u/Martery → u/GoodOmens]

I think we agree on a point - a treasury ladder has less liquidity compared to a money market. But there are no sell restrictions - there just isn't anyone there offering the price you want for your treasury. A sell restriction literally prevents you from transacting - think closed end funds that have liquidity restrictions (you can only buy/sell a certain amount at specified dates).

There is nothing preventing you from calling up Merrill's bond desk and asking them to submit a RFQ for the price you want. There's no guarantee that someone will purchase your treasury bill, but keep on going lower and someone will eventually jump on it. The spread eats you alive, but you'll still be able to exit - just not at the price you want.

[u/drosse1meyer → u/Caudebec39]

great info here

i have two large CDs maturing in a few weeks (5% and a 4%). i wish i had renewed last year for a much longer rate but alas i didnt.

aside from treasuries - whats the easiest/best choice? take that money and put in VUSXX or a TIPS etf or find another CD (seems like 4.25% or so for 1 year is about the going rate)?

[u/CollectionLeft4538 → u/Caudebec39]

The US Treasury web site is not user friendly. I heard Fidelity is much easier.

[u/jpcrispy]

I think vusxx and vbil are some of the best options that vanguard offers for EF savings. You could save yourself the expense ratio by buying treasuries directly, but not worth the hassle to me.

[u/Possible-Oil2017 → u/jpcrispy]

I don't buy them as part of the direct offering, but through my brokerage account. This is the best strategy for me as I get to control when the bonds are purchased and sold.

[u/jpcrispy → u/Possible-Oil2017]

Which brokerage. Im not sure how to do this on VG

[u/Possible-Oil2017 → u/jpcrispy]

You go to products drop down and choose bonds. Then you pick the treasury bond you wish to purchase. You can later sell or hold to maturity.

[u/iamthetoe77 → u/jpcrispy]

No expense ratio but do they not charge a transaction fee each instance? That would add up quickly.

[u/jpcrispy → u/iamthetoe77]

Im not entirely sure. Ive never bought them dircectl. Have always used a MMF.

[u/Possible-Oil2017 → u/iamthetoe77]

I buy them through my broker, no fees

[u/Chill_Will83]

I’m weighing the complete access to funds of a money market mutual fund vs the higher yield of intermediate and long term treasuries. I think I’ll to do half 15% and half 15% with my 70/30 allocation when I retire.

[u/Ok_Appointment_8166 → u/Chill_Will83]

One thing that may or may not matter to you is that the money market is going to have taxable dividends monthly where you may push the interest income of t-bills or longer term treasuries into future years. Also it is slightly easier to report the state-tax free interest on treasuries which have their own box than dividends where it is an extra step.

[u/Chill_Will83 → u/Ok_Appointment_8166]

Good point about the state tax exempt interest. My marginal state rate could be up to 5.75% even in retirement, so that's huge!

[u/Ok_Appointment_8166 → u/Chill_Will83]

VUSXX dividends are equally state tax exempt - you just have to be sure you report them correctly.

[u/yottabit42]

It depends on your tax bracket really. Have a look at the MMF Yields tab of my rebalance calculator. You can enter your tax info at the top and it will calculate the best after-tax yield MMF for your situation.

[u/Historical-Ant1711]

Depending on your tax bracket VMSXX (municipal money market) might come out ahead. 

You can use this calculator to help figure out after tax yields 

https://digital.fidelity.com/prgw/digital/taxyieldcalc/

Since you are considering bond funds too look at VWSUX, an ultra short term muni bond fund that has minimal interest rate risk due to short duration. I'm sure there are corporate or Treasury bond equivalent funds if the tax advantages aren't worth it regarding the munis 

[u/earth_man_7]

Yup, with the state tax benefit and low risk, this is what I use. I’m not aware of any better alternatives.

[u/thonda27]

I don’t know if it’s considered the best, but I do have half of my money in VUSXX and have no problem.

[u/NeuralNexus]

VUSXX is the best 'easy' option, imo. I use it personally.

[u/Recent_Blacksmith282]

I park my emergency funds there and haven’t had any regret 

[u/itsbentheboy]

I use VUSXX as well, also in a state that exempts it.

You want 2 things in a non-cash emergency fund: Capital preservation and ease of liquidation.

For me, those 2 categories are handled excellently with a money market account holding VUSXX.

The minor returns are a sweet extra, and I would never chase returns with my emergency fund, so i stick with VUSXX

[u/Wonderful_Watermel0n]

I like to split my cash across VUSXX and a high yield savings account (currently Ally, but I'm considering switching over to Vanguard Cash Plus). It's probably unjustified paranoia, but I sleep a time bit better knowing I don't have a single point of failure should I need to access that cash.
Obviously the tax advantages and slightly higher interest rate of VUSXX make it attractive, but the difference in dividends/interest is negligible (if the difference is not negligible, I would argue you have too much cash on hand)

[u/BillNye69]

I use USFR.

[u/InvertedInsideWinger]

How does this compare to VMFXX. That’s my money market at Vanguard and makes 4.2%.

[u/WorldGuardian1 → u/InvertedInsideWinger]

The 7-day yield for Vanguard Treasury Money Market Fund (VUSXX) is currently 4.18%. This yield represents the annualized income return based on the fund's performance over the past seven days. The fund invests primarily in short-term U.S. Treasury securities.

[u/InvertedInsideWinger → u/WorldGuardian1]

So why not just use VMFXX. It’s 4.21% currently. While not a fortune-teller, doesn’t appear to be going down soon.

I put half my emergency fund there. One click to transfer back to my brick and mortar. The other half is liquid ad the brick and mortar in a HYSA making 3.5%.

Is there any reason to over complicate the strategy? Tax savings on state side?

[u/benploni → u/InvertedInsideWinger]

Yes, tax savings is the answer. If you live in a high-tax state, the effective return on VUSXX is higher than VMFXX.

[u/SnooMachines9133]

If you're in a 30+% tax bracket, I would consider the mini funds. Otherwise, VUSXX is pretty good for an emergency fund.

I also have i-Bonds with Treasury Direct.

[u/Arronwy]

There was a Google sheet at one point that showed the best money maker for your state, income, etc. 

[u/crusheratl]

What will be the best option if interest rates drop back to where they were a few years ago?

[u/Peeeenutbutta]

Lots of people love SGOV. I have been using it over one month CD’s lately.

[u/Hairy_Pineapple588 → u/Peeeenutbutta]

I’m using Sgov now. Just started so trying it out.

[u/Environmental-Low792]

I set up check writing, so I can write someone a check in an emergency, or write it to myself, use my phone to deposit it into my checking account, then use an ATM to get cash.

With treasuries there's a couple days delay to get the cash.

For long term emergency fund, I use iBonds.

[u/MaryandLynn]

We use HYSA 6.84% and SGOV 4.69% in our Fidelity account.

It takes usually 24 hours for the money to show up in our bank account if we need it.

Unless you are in jail and need bail money, these do not fluctuate in price and pay a decent monthly return

[u/DesertLabRat → u/MaryandLynn]

Where are you getting 6.84% HYSA?

[u/MaryandLynn → u/DesertLabRat]

Stock ticker HYSA dividend is 6.84%

[u/Timbukthree]

I'm a fan of the no risk CDs from Marcus for an emergency fund if you're worried about rates falling. You get your rate locked in but can also pull out the money with no downside whenever you want (after a week). Present yield isn't as good as VUSXX and you don't get the tax benefits though

[u/CreativeLet5355]

I’m high tax. But right now vmfxx is 4.21% and vmsxx is 1.75%. That’s clear cut for me.

My state income low is modest. So for me despite being in a high tax bracket vmfxx has been my clear choice.

The nice thing here is it’s easy to change stances without negative implication.

[u/Wonderful_Watermel0n → u/CreativeLet5355]

VUSXX is even better if you live in a state with income tax. It's yield is basically identical to VMFXX, except its dividends are mostly, maybe even all depending on the state, tax exempt.

[u/ditchdiggergirl]

I prefer an MMF for my efund. I’m not sure it matters which one, since “best” tends to change and the VG options are all pretty comparable.

Back when we were younger and more financially precarious, I kept a MMF as my “tier 1” efund, but also kept some muni funds in taxable as part of my bond allocation. They were invested for yield, not stability of principal. But in the event of an actual emergency, those bonds were to function as my tier 2 efund. Had that larger emergency arrived I wouldn’t worry about a small decline in the NAV.