Add the marshmallows to a microwave safe bowl. Sprinkle the water over the top. Microwave for 30 seconds on high, stir, then microwave for 30 more seconds, or until the marshmallows are completely melted. Stir in the vanilla extract.

Add half of the powdered sugar, and stir to combine using a sturdy spoon. It will be very sticky and may be difficult to stir, but keep at it! Add additional powdered sugar to make a dough that has the consistency of play dough. You may need to knead it with your hands to make it smooth.

To color the fondant, add a few drops of gel food coloring into a ball of fondant, and knead the food coloring into the fondant until evenly distributed. Wear gloves to prevent transferring the food color to your skin, and add additional powdered sugar if the fondant gets sticky.

Roll out and use to top cookies or cupcakes. Store in an airtight container.