Time for a Money-Market Makeover

Credit crunch makes tax-free accounts inviting.

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My boyfriend is always complaining about his "high performance" Wachovia money market account, which pays a puny 0.04 percent in interest on balances up to $5,000. He's in the process of moving his savings to an online bank, where he'll earn a more respectable 3.4 percent.

But an even better choice might be a tax-free money market account, says Brett Arends of the Wall Street Journal. Thanks to "wacky gyrations" in the credit markets, tax-free accounts now yield nearly as much as those subject to federal income tax, he says. Or, to put it this way: "A regular taxable money market account makes no sense at all at the moment."

Arends takes a look at Vanguard's top-paying taxable money market fund, which currently yields 3.58 percent. He says most people would be better off with the tax-exempt version, which has a tax-free yield of 3.3 percent. That looks slightly lower, but for someone in the 25 percent tax bracket, it's a tax-equivalent yield of 4.4 percent. (Morningstar's nifty tax-equivalent-yield calculator offers more comparisons.)

Recommends Arends: "Check the rates at your brokerage. Usually your broker parks your cash balance in a money market fund. Making sure it gets parked in a tax-exempt fund may be as simple as a phone call or changing your account preferences online. It's not exciting, but it's easy."