Choose money market funds over money market accounts if you’re looking to ease your tax burden. While money market accounts consistently deliver conservative returns on your principal, a strategic money market fund will help you stay away from costly taxes and maximize returns on interest rates.

Don’t Let Uncle Sam Take It All
First of all, if you are paying high state taxes, but you’re in a low federal tax bracket, there are specific types of money market funds that will optimize your portfolio. A U.S. Treasury money market fund can really ease the tax burden on someone who pays a lot to their state. One example of this type of fund is the Vanguard Money Market Reserves U.S. Treasury Portfolio.

Many firms also offer funds that are tax-free at both the state and federal levels. The Fidelity Spartan MA Money Market Fund operates this way. Fidelity can offer a tax-free money market fund because they select securities that are not subject to local or federal debt.

How Dividends are Paid to Investors
Of course, a tax-free money market fund refers to the dividends paid out by the fund, not the money put into the funds. The money you deposit into these funds is still taxable, but the dividends earned from them often are tax-free.

Types of Investments in Money Market Funds
Most firms invest in the same general assortment of securities. These securities are usually related to bonds, so certain funds can have rates that are slightly higher or lower than other funds.

Analyze your tax situation and figure out a money market fund that can help you enhance your dividend returns.