Do I need to pay taxes on the dividends from my money market account that feeds my Roth IRA?

The good news is that you don't need to report these dividends on your taxes! Any earnings that occur within a Roth IRA container - including dividends from a money market fund like VMFXX that's part of your Roth IRA - are not taxable. The money market account is just the holding place for your contributions before they're invested in your target fund (VTTSX). Think of your Roth IRA as a protective bubble - anything that happens inside that bubble (dividends, capital gains, interest) is tax-free as long as you follow the rules for qualified distributions when you eventually withdraw the money in retirement. Vanguard might send you a Form 5498 showing your contributions for the year, but that's just for your records - you don't need to file it with your tax return.

I went through the same confusion with my Vanguard account last year! Definitely check out https://taxr.ai - it helped me sort through all my investment accounts and clearly told me what was taxable and what wasn't. I uploaded my Vanguard statements and it immediately identified that my money market dividends within my Roth weren't taxable, but flagged other dividends from my taxable brokerage account that I needed to report. Saved me from both overpaying and underpaying!

Just wanted to follow up about my experience with taxr.ai after the recommendation here. I uploaded statements from both my Fidelity and Schwab accounts and it was incredibly helpful! It clearly separated my taxable dividends from non-taxable ones and explained which accounts generated what types of tax forms. The best part was discovering I had some foreign tax withholding in one of my international funds that qualified for a tax credit I didn't know about. The site highlighted it directly on my statement and explained how to claim it. Definitely using this for all my investment accounts going forward!

If you're still confused about any of this and want to talk to someone at the IRS directly, I highly recommend using https://claimyr.com to get through to them. I spent HOURS on hold trying to get clarification about some Roth conversion questions last month before I found this service. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you when an agent is about to pick up. Saved me from wasting an entire afternoon on hold and the IRS agent was actually super helpful about explaining which investment activities needed to be reported.

I need to eat my words and admit I was wrong about Claimyr. After expressing skepticism here, I had an urgent question about some dividends that were misreported on my 1099 and needed to talk to the IRS before filing my taxes next week. I decided to give Claimyr a shot as a last resort, and it worked exactly as advertised. I got a call back within about 40 minutes (when their estimate said the hold time was over 2 hours), and the agent was able to confirm that I should report the corrected information my brokerage had sent me, not the original 1099. Saved me from potentially triggering an automated notice or audit situation. The service was definitely legitimate and saved me a ton of time and stress. Consider me converted from skeptic to believer!

Just wanted to add - make sure you're not confusing your Roth IRA with a traditional IRA. Traditional IRAs have different tax reporting requirements. With a Roth, you contribute after-tax money, so you don't get a tax deduction now, but all growth (including those money market dividends) is tax-free when withdrawn properly in retirement. With a traditional IRA, you might get a tax deduction now (depending on income and whether you have a workplace retirement plan), but you'll pay taxes on ALL withdrawals in retirement, including on those little dividends that accumulated over time.

Quick question - if I eventually rollover my 401k from a previous employer into a new Vanguard IRA, will that money also go through the VMFXX holding account? And would there be any tax implications for that temporary period?

Great question! I went through this exact same confusion when I first started with my Roth IRA. The key thing to remember is that VMFXX is actually part of your Roth IRA account structure at Vanguard - it's not a separate taxable account. Think of it as the "cash parking spot" within your Roth IRA where money sits before getting invested. Since those dividends are being earned inside your Roth IRA container, they're completely tax-free and you don't need to report them anywhere. Vanguard won't even send you a 1099-DIV for these because they know it's not taxable income. The only tax form you might get from Vanguard is Form 5498 around May, which just shows your contributions for the year (and that's just for your records, not something you file with your return). You're doing everything right by contributing to your Roth IRA! Just keep making those contributions and let the money work for you tax-free.

This is such a common source of confusion for new investors! You're absolutely right not to worry about those VMFXX dividends - they're completely tax-sheltered within your Roth IRA. One thing that might help put your mind at ease: if you log into your Vanguard account online, you can actually see how the money flows. Your contributions go into VMFXX (the settlement fund), earn those tiny dividends while waiting, and then get automatically invested into VTTSX based on your settings. All of this happens within the "Roth IRA wrapper" so none of it generates taxable events. Also, don't stress about tracking those dividend amounts - Vanguard does all the record-keeping for you. When you eventually retire and start taking qualified distributions decades from now, you won't owe taxes on any of the growth that happened along the way, including those little money market dividends that accumulated over the years. Keep up the great work with your investing journey!

You're absolutely on the right track with your understanding! Those VMFXX dividends are indeed tax-sheltered because they're occurring within your Roth IRA. The money market fund is essentially Vanguard's "waiting room" for your contributions before they get invested in VTTSX. I had the exact same worry when I first started - seeing those little dividend amounts and panicking about whether I needed to track them for taxes. But here's the beautiful thing about Roth IRAs: once your money crosses that threshold into the account, everything that happens inside (interest, dividends, capital gains) grows tax-free. You won't receive a 1099-DIV for these VMFXX earnings because Vanguard knows they're not taxable. The only form you might see is the 5498 in May showing your contributions, but that's just informational. Keep doing exactly what you're doing - those automatic investments into VTTSX are a great long-term strategy!

I completely understand your confusion - this is one of those things that seems more complicated than it actually is! You're absolutely correct that those VMFXX dividends don't need to be reported on your taxes. Since VMFXX is the settlement fund within your Roth IRA, any earnings there are just as tax-sheltered as earnings in your VTTSX fund. Think of it this way: your Roth IRA is like a special tax-free zone, and VMFXX is just the "lobby" of that zone where your money waits before moving to the main investment floor. Everything that happens in that lobby is still within the tax-free zone. One tip for peace of mind: you can actually adjust how long money sits in VMFXX by setting up automatic investing with a shorter frequency if you want. But honestly, those small dividends you're earning while waiting are just a nice little bonus that will compound tax-free over the decades. You're doing great with your investment strategy - stick with it!

As someone who works in tax preparation, I can confirm everything others have said here is absolutely correct! Those VMFXX dividends are completely tax-sheltered within your Roth IRA container. What might help ease your mind even further: Vanguard is required by law to send you a 1099-DIV for ANY taxable dividend income. Since you're not receiving one for your VMFXX earnings, that's Vanguard's way of confirming these dividends aren't taxable. They have sophisticated systems that track which accounts are tax-sheltered and which aren't. I see this confusion constantly during tax season - new investors panic about small transactions they see in their retirement accounts. The beauty of the Roth IRA is its simplicity: contribute after-tax dollars, and then forget about taxes until you're retired and taking distributions (which will be tax-free if done correctly). Those tiny money market dividends are just working in your favor, compounding tax-free over the decades ahead. Keep up the excellent work with your consistent investing approach!