A possible solution to ease one’s tax burden is to opt for money market funds over money market accounts. Though money market accounts generally return a good interest rate on your invested principal, money market funds help minimize taxes and further increasing capital appreciation.
If your situation is one where you are stuck paying high state taxes but are in low federal tax bracket, certain money market funds can help you. Money market funds made up of U.S. Treasury bonds, such as the Vanguard Money Market Reserve U.S. Treasury Portfolio, can help you alleviate some of the burden caused by high state taxes.
Several brokerages also offer funds that are exempt from taxes at both the state and federal levels. One example is the Fidelity Spartan Money Market Fund.  This fund is possible because it invests in securities that are exempt from federal as well as local taxes.
When we talk about an account being tax free, we are referring to the dividends that the fund pays out and not the initial principal. That money is still subject to taxes, but all dividends earned on that money is tax free.
The interest rate a money market fund pays is dependent on the exact securities that the institution invests in. Most financial institutions invest into the same basic types of securities, often bonds, and therefore the interest rate usually vary only slightly.
If your tax situation is a primary investment concern, consider switching from a standard money market account to something better suited to tax management, money market funds. You work hard for your money. Why not do all you can to keep it for yourself?
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