What's the tax rate on dividends from money market mutual funds?

Question

I'm trying to figure out whether to put some liquid savings in an on-line savings account on which, based on my understanding, the interest is taxable at the marginal income tax rate .... OR in a money market mutual fund which pays dividends ... what's the tax rate applicable on these dividends?

Answer 1

Under the new law, dividends are taxed at a 15 percent rate for most individual taxpayers. Dividends received by low income individuals are taxed at a five percent rate until December 31, 2007 and become fully untaxed in 2008.

*** However, money market funds are tax at your invidivudal tax rate.

Answer 2

The same.  Money market mutual fund dividends are also taxed at your marginal income tax rate.  

The ONLY dividends or interest that are not taxed at your marginal income tax rate are:

1. Anything that is tax-deferred as part of an IRA, 401K, etc.

2. Anything that is tax-free as part of an HSA, Roth IRA, etc.

3. Investments in direct obligations of the U.S. Treasury Department.  This are subject to federal income tax only, not state income tax.  In certain cases, U.S. Savings Bond interest used to pay higher education expenses may be excluded.

4. Muncipal, etc., bonds.  These are not subject to federal tax, but may be subject to state or local tax.

Answer 3

Unless you are a corporation, dividends are taxed at your marginal income tax rate as well. (Why not open up a self directed IRA?) You can do all of this online too and not pay any taxes as you trade...you just won't be able to touch the money...

Answer 4

Interest you earn in a savings account is taxed as ordinary income.  This means it is taxed the same as your wages.

Dividends from a money market mutual fund are considered dividends, not interest.  Dividends get a preferential tax treatment.  The maximum rate for dividends is 15%.

So, if you are in the 15% tax bracket or less, there is little or no difference.  If you are in a bracket higher than 15%, you will pay less income tax by putting your money into a money market mutual fund.