Checkwriting with Vanguard Money Market Funds

March 12, 2020

My fiancee and I have some money in a Vanguard mutual fund account that we’ve earmarked for future use (some of it is for a wedding, but mostly it’s for a rainy day) and one feature I like about the account is that it has free checkwriting. This isn’t anything special, many brokerages offer this feature, but it does require that you keep the some money in a bond or money market asset. You can’t write a check and have it auto-debited from a regular mutual fund account.

To set this up, you have to first select a money market account to give checkwriting privileges to. I took a quick look at the money market funds offered, there are four taxable money market funds and six tax-exempt money market funds (plus close to two dozen bond funds of both taxable and tax-exempt types), and at first couldn’t really see much of a discernible difference among them.

The only obvious difference is that the returns on the taxable money market funds are higher than the returns on the tax-exempt money market funds, which makes a little bit of sense because they’ll be much closer after taxes are concerned. The one year average of the four taxable funds ranged from 4.88% to 5.22% compared to 3.50% to 3.6% for the tax-exempt funds. When you consider the underlying construction of money market funds are that they invest in short term market instruments like CDs, commercial paper, bank notes, etc; the differences between one money market fund and another will just be in the level of risk it accepts.

Either way, I think I’m just going to pick Vanguard Prime Money Market Fund (VMMXX) because it has the highest return. All of the taxable fund expense ratios are 0.29% and the minimums are all $3k with the exception of the Admiral Treasury Money Market fund. It has an expense ratio of 0.13% but a minimum of $50k.

If they offered a Maryland Tax-Exempt money market fund, I probably would’ve chose that one but they don’t. They only offer California, New Jersey, New York, Ohio, and Pennsylvania. The beauty of those funds are that they are tax-exempt in those states plus federal income taxes. If you live outside of those states, you would only be shielded against federal income taxes.

After you pick a fund and add some money to it, setting up the checkwriting is a cinch. Simply go to your Account Profile and click on Checkwriting underneath Manage my accounts. They will ask to confirm that you want to establish Checkwriting. Click Yes and a separate PDF will open up containing a form you must fill out and mail in (because it contains signatures maybe? I don’t understand why it can’t be faxed).

Just some quick rules about the checkwriting, the check must be greater than $250 and Vanguard doesn’t withhold any taxes, even though it’s considered a distribution. It’ll be reported on a 1099-R. By setting up this checkwriting, we can avoid the need to transfer money from Vanguard to our Bank of America account before writing a check – thus saving ourselves a 3-4 day wait. Checkwriting is awesome!

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