Learn about tax-exempt money market and bond funds with Vanguard. Discover how these investments can fit into your overall investment strategy.

Investment types
Mutual funds
Education
Page
Understanding investment types
Funds
Taxes
Bonds
Investment types

What are tax-exempt funds?

What are tax-exempt funds?
success
You have saved this article
2 minute read
success
You have saved this article
A young, smiling couple is looking at a shared phone screen.

Find out if you could be saving on taxes

Who doesn't want a lighter tax bill? Although tax-exempt mutual funds usually produce lower yields, you generally don't have to pay federal taxes on earnings from tax-exempt money market and bond funds. And you can save even more if you live in a state that offers similar exemptions.

But before you invest, ask yourself a few questions:

Am I investing outside of an IRA or another retirement plan?

You won't gain anything more by including a tax-exempt mutual fund in an already tax-advantaged account, like an IRA. Instead, you'd actually be giving up potential yields.

Am I in one of the higher tax brackets?

If you're not, tax-exempt funds probably aren't the right fit. You likely won't save enough in taxes to make up for the lower yields you typically get from a tax-exempt fund.

If you answered "yes" to both of these questions, a tax-exempt fund might be worth a look.

Choose your tax-exempt funds

If you've determined you're a good candidate to start investing in tax-exempt funds, take a look at the funds you have to choose from.

See a list of Vanguard tax-exempt money market funds

See a list of Vanguard tax-exempt bond funds

We're here to help

Have questions? Contact us

Want to learn more?

See why you should consider investing in tax-efficient funds

Find out how you can become a tax-savvy investor

Open your account online

Get started

Articles you might like

Investing strategies

How to start investing: A guide for beginners
success

Retirement

Saving for retirement
success

Personal finance

Understanding investment goals and goals based investing
success

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest.

Vanguard average mutual fund expense ratio: 0.08%. Industry average mutual fund expense ratio: 0.51%. All averages are asset-weighted. Industry average excludes Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2024.

Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.

Although tax-exempt mutual funds usually produce lower yields, you generally don't have to pay federal taxes on earnings from tax-exempt money market and bond funds.

Although the income from municipal bonds held by a fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.