How are bond fund and money market dividends taxed compared to stock dividends?

Interest from bond funds and money market funds is taxed as ordinary income – your full marginal rate, with none of the preferential treatment stock dividends can get. That's because interest doesn't meet the "qualified dividend" requirements, so a bond fund yielding 5% is fully taxed up to 37% for high earners. Stock dividends from U.S. companies and broad index funds, by contrast, are typically qualified and taxed at 0–20%. This tax gap is the core reason taxable bonds and money market funds are best held inside tax-sheltered accounts like an IRA or 401(k), where the ordinary-income tax is deferred. In a taxable account, high earners often prefer municipal bonds, whose interest is federally tax-free. The exception: Treasury interest is taxable federally but exempt from state income tax.