A government money market fund is the low-effort way to own Treasury bills: the fund buys them, along with similar short-term government debt, and you hold shares worth about $1.00 each. Owning bills yourself skips the fund's fees and, in most states, saves some tax, but you take on the buying, rolling and record keeping. This page covers what a government fund holds, what it charges, how its dividends are taxed next to bill interest, and what the convenience costs in dollars. It belongs to our Treasuries section, which covers buying, holding and taxing bills.
What is inside a government money market fund?
Mostly short Treasury bills, other federal government debt and repurchase agreements backed by that debt, packaged into shares that aim to stay at $1.00. Under SEC rules a government money market fund must keep at least 99.5% of its assets in cash, government securities and repurchase agreements fully collateralized by cash or government securities. Government and retail funds generally seek a stable $1.00 share price, and a fund whose value per share slips by more than half a cent is said to have broken the buck.
The mix varies by fund. According to its quarterly commentary, at September 30, 2026 the Vanguard Federal Money Market Fund had about 39% of its assets in Treasuries, 37% in US agency obligations and 24% in repurchase agreements, with an average maturity of 22 days. Treasury money market funds are narrower: the Vanguard Treasury Money Market Fund invests at least 80% of its assets in Treasury securities and repos fully collateralized by them. Not every agency security carries the full faith and credit of the US government, and that mix is one reason a government fund and a Treasury-only fund are taxed differently, as we show below.
Because holdings mature within weeks, a fund's yield follows new bill yields with a short lag, and income accrues to you daily. The full mechanics, including how prime and tax-exempt funds differ, are in our guide to how money market funds work. If you are not sure whether you hold a fund or a bank account, see money market fund vs money market account.
Owning bills vs a government fund, feature by feature
The table sets the two side by side before we put dollar figures on the differences that cost money.
| Feature | Owning T-bills | Government money market fund |
|---|---|---|
| What stands behind it | Full faith and credit of the US government | The fund's holdings; not FDIC-insured, and the sponsor need not cover losses |
| Yield | Fixed at purchase until maturity | Changes daily as holdings mature and are replaced |
| Ongoing cost | None at TreasuryDirect; broker costs vary | Expense ratio, taken from income |
| State income tax | Interest exempt | Taxable except the share from US government obligations, where your state allows it |
| Smallest purchase | $100, in $100 increments | Set by the fund |
| Getting cash out | At maturity, or by selling at the market price | Redeem any business day at about $1.00 a share |
| Reinvesting | Schedule rollovers or buy new bills | Automatic |
| Tax form | Form 1099-INT | Form 1099-DIV |
Two rows carry a direct cost, the fund's fee and the state tax on its income, while the rows on cash and reinvesting are where the fund earns its keep. The next sections price both sides.
How much do fund fees take from the yield?
The expense ratio comes straight out of the fund's income, so a fund holding bills that yield 4.08% and charging 0.24% pays you about 3.84% before tax. The yield a fund advertises, such as its seven-day SEC yield, is already net of that fee, which makes the charge easy to overlook.
Fees vary widely. The Investment Company Institute's figures for 2025 put the asset-weighted average expense ratio of money market funds at 0.24% and the median at 0.32%, with the 10th percentile at 0.14% and the 90th at 0.75%. The Vanguard Federal Money Market Fund's prospectus lists total annual operating expenses of 0.11%, and the Vanguard Treasury Money Market Fund's lists 0.07%. Buying bills through TreasuryDirect costs nothing, since Treasury charges no purchase fee or commission. At a broker, check for commissions or markups.
| Expense ratio | Annual cost on $75,000 | Where it sits |
|---|---|---|
| 0.07% | $52.50 | Treasury fund prospectus example |
| 0.11% | $82.50 | Government fund prospectus example |
| 0.14% | $105.00 | 10th percentile of money market funds |
| 0.24% | $180.00 | Asset-weighted industry average |
| 0.32% | $240.00 | Industry median |
| 0.75% | $562.50 | 90th percentile of money market funds |
A fee looks tiny as a percentage but less so in dollars, and it is charged every year whatever rates do. Our glossary entry on the expense ratio explains how it is calculated and deducted.
Are money market fund dividends free of state tax?
Only partly: the slice of a fund's income that comes from US government obligations can be exempt, but repo income and some agency debt are usually taxed. Interest on Treasury bills you own is exempt from state and local income tax by federal law, and it arrives on Form 1099-INT in a box of its own. A fund's payouts are dividends, reported on Form 1099-DIV, so the exemption has to pass through the fund.
Each year, fund companies publish the share of each fund's income that came from US government obligations. You multiply the dividends in box 1a by that percentage to find the part your state may exempt. Vanguard's figures show how much the share can vary:
| Fund and tax year | Share of income from US government obligations |
|---|---|
| Vanguard Federal Money Market Fund, 2025 | 66.61% |
| Vanguard Federal Money Market Fund, 2024 | 59.87% |
| Vanguard Treasury Money Market Fund, 2025 | 100% |
| Treasury bills you own directly | All interest exempt |
Repurchase agreements are the main reason a government fund falls short of 100%. Even when the collateral is Treasury debt, repo income is generally taxable by states, as is interest from mortgage agencies such as Ginnie Mae, Fannie Mae and Freddie Mac.
Some states add a threshold. California, Connecticut and New York let fund dividends pass through as exempt only if at least 50% of the fund's assets are US government obligations at the close of each quarter, according to Vanguard's tax guide, and California's Franchise Tax Board sets out its own version in Publication 1001. In those states, a fund that misses the test passes through no exemption at all. Rules elsewhere differ, so check your state's instructions or ask a tax professional. For bills you own, the rules are in are T-bills taxable.
What does a fund's convenience cost per year?
It is the fee plus any extra state tax, and on a large balance in a high-tax state that can run to hundreds of dollars a year.
Worked example: $75,000 for a year in California
The saver is a single filer in the 32% federal bracket, which in 2026 covers taxable income from $201,775 to $256,225, and in California's 9.3% bracket. Every option earns the same gross 4.08%, the 13-week bill's investment rate on October 30, 2026, held flat for the year for simplicity. The government fund's 66.61% exempt share is the 2025 figure from the table above, while its 0.24% fee is the industry average rather than that fund's own 0.11%.
| Option | Income before tax | Federal tax at 32% | California tax at 9.3% | Kept after tax | Cost vs owning bills |
|---|---|---|---|---|---|
| Bills held directly | $3,060.00 | $979.20 | $0.00 | $2,080.80 | none |
| Government fund, 0.24% fee, 66.61% exempt | $2,880.00 | $921.60 | $89.43 | $1,868.97 | $211.83 |
| Treasury fund, 0.07% fee, 100% exempt | $3,007.50 | $962.40 | $0.00 | $2,045.10 | $35.70 |
| Government fund that fails the 50% test | $2,880.00 | $921.60 | $267.84 | $1,690.56 | $390.24 |
In a state with no income tax only the fee matters: the government fund would cost $122.40 a year after federal tax, and the Treasury fund still $35.70.
One way to judge those numbers is to price your own time. If buying, rolling and tracking bills yourself took about three hours a year, the government fund in the example would be charging roughly $71 an hour to do that work for you, and the Treasury fund about $12. The cost also scales with the balance: on $7,500, the same government fund would cost about $21 a year, which may be a price worth paying to never think about rollovers. To see how either yield compounds over several years, use the compound interest calculator.
How quickly can you get cash from each?
A fund can often wire cash the same day if you ask before its cut-off, while a bill pays out at maturity or when you sell it. Cut-offs vary by fund company. Vanguard's prospectus, for instance, offers a same-day wire from its Federal Money Market Fund when a telephone redemption request arrives before 12:30 p.m. Eastern time; otherwise the money goes out the next business day. Funds also reserve the right to delay payment for up to seven calendar days, and SEC rules let a fund's board charge a liquidity fee when it decides that is in the fund's best interest.
Bills need more planning, though less than you might expect. A bill held at a broker can be sold any business day, while one held in TreasuryDirect must first sit for 45 calendar days and then be transferred out. The bigger difference is the routine work, which a fund does for you:
- Rolling. TreasuryDirect can reinvest a maturing bill into a new one of the same term, but scheduled reinvestments are capped at 25 for 4-week bills, 16 for 6-week, 10 for 8-week, 7 for 13-week, 6 for 17-week, 3 for 26-week and 1 for 52-week, which covers about two years.
- Deadlines. You can set up, change or cancel a reinvestment only until four business days before the auction of the new security.
- Odd amounts. Bills come in $100 steps, so small sums and leftovers sit idle; a fund takes any dollar amount and reinvests dividends automatically.
- Tracking. Each bill is a separate purchase with its own maturity date to watch, while a fund is a single holding.
A T-bill ladder is the usual way to keep bills maturing at regular intervals, and our guide to where to park cash short term compares the wider set of options.
What are the risks of money market funds compared with T-bills?
A bill held to maturity pays its face value; a fund promises no fixed outcome, though government funds have strict rules on what they can hold.
- Share price. A fund's value per share can fall below $1.00 if its holdings lose value, and the fund is not FDIC-insured. A bill held to maturity repays its face value.
- Access under stress. A fund can charge liquidity fees, delay payment for up to seven days or, if it is liquidating, suspend redemptions. A bill's exit depends on market prices instead.
- Credit mix. Government funds can hold agency debt that is not backed by the full faith and credit of the US government; Treasury-only funds largely avoid it.
- Falling rates. With an average maturity of a few weeks, a fund's yield drops soon after market rates do. A bill keeps its rate until maturity and then faces the same reinvestment question.
- Negative rates. If rates ever turned negative, SEC rules let stable-price funds either float their share price or cancel shares to hold it at $1.00.
- Price risk on bills. Sell a bill before it matures, after a rise in rates, and the price may not cover what you paid plus the interest accrued.
- Inflation. Neither keeps pace with prices automatically, and the after-tax yield on both can trail inflation.
The bill-side risks get a fuller treatment in are Treasuries risk-free.
When does each one make more sense?
Funds tend to suit balances you dip into often or that are too small for the tax gap to matter, and bills suit larger sums parked for months. A fund fits cash you draw on for bills and transfers each month, money waiting to be invested elsewhere, or a balance in a state with no income tax, where the gap is just the fee. Bills fit a large balance in a high-tax state, money you can commit for weeks or months at a time, and holders who don't mind scheduling rollovers. A Treasury-only fund sits between the two, narrowing the tax gap while keeping most of the convenience.
If you want bill exposure in a brokerage account without rolling anything, a T-bill ETF is another route, with trading costs of its own; see T-bill ETFs vs buying T-bills. For cash held at a bank, our comparisons of T-bills vs high-yield savings and T-bills vs CDs run the numbers, and the Treasury bill calculator prices any bill you are considering.