Where to Keep Cash: High-Yield Savings, Money Market Funds, CDs, and T-Bills Compared

Money that will be needed within a few years does not belong in equities. That much is uncontroversial. Where it does belong is a more interesting question than it looks, because the five realistic vehicles differ on four dimensions that people rarely evaluate together — and one of those dimensions, tax treatment, reorders the ranking entirely depending on where you live.

The Four Dimensions

Yield. What the vehicle pays, and whether the rate is fixed or floats with short-term rates.

Liquidity. How quickly the money becomes spendable, and what it costs to get it early.

Tax treatment. Whether interest is subject to federal tax, state tax, or both. This is the dimension most often ignored, and on a five-figure balance in a high-tax state it is worth more than the yield differences people spend their time comparing.

What backs it. FDIC or NCUA insurance, the full faith and credit of the US Treasury, or a fund structure with no insurance at all. These are genuinely different things.

The Comparison

The State Tax Detail That Reorders Everything

Interest on US Treasury securities — bills, notes, bonds, and savings bonds — is exempt from state and local income tax by federal statute. Bank interest is not.

This is not a rounding error. Compare a Treasury bill yielding 4.20% against a high-yield savings account yielding 4.35% for a California resident at a 9.3% state marginal rate:

• T-bill: 4.20%, no state tax → after-state-tax yield 4.20%
• HYSA: 4.35% × (1 − 0.093) → after-state-tax yield 3.95%

The lower-headline-yield Treasury wins by 25 basis points. Framed the other way: the tax-equivalent yield of a 4.20% T-bill for this taxpayer is 4.20% ÷ (1 − 0.093) = 4.63%. The savings account would need to pay 4.63% just to match it.

The magnitude scales directly with the state rate:

In a no-income-tax state, this consideration disappears entirely and the comparison comes down to yield and convenience. In a high-tax state, it dominates.

The same applies partially to money market funds. Government money market funds hold Treasuries and repurchase agreements; the portion of their income attributable to direct Treasury obligations passes the state exemption through to shareholders. The exempt percentage varies by fund and by year, and funds publish it annually. Several states — California, New York, and Connecticut among them — additionally require the fund to hold at least 50% US government obligations at each quarter-end for the exemption to pass through at all. Repo income generally does not qualify. Worth checking the specific fund rather than assuming.

The Vehicles in Detail

High-Yield Savings Accounts

The default, and for good reason: no minimum, no term, transfers in a business day or two, and FDIC insurance to $250,000 per depositor, per insured bank, per ownership category.

The rate floats at the bank's discretion, which cuts both ways. When short rates rise, competitive online banks pass it through quickly. When rates fall, they cut quickly too. Rate-chasing between institutions for 15 basis points is rarely worth the friction — on $30,000, that is $45 a year.

The failure mode worth knowing: some banks operate a headline-rate account for new money and quietly leave legacy accounts on a much lower rate. Checking the current rate on an account opened three years ago is a five-minute exercise that occasionally uncovers a full percentage point.

Money Market Funds

Mutual funds holding very short-term instruments, typically maintaining a stable $1.00 share price. Not FDIC insured — this is the key structural difference from a savings account.

The uninsured status is worth taking seriously without overstating it. Government money market funds hold Treasuries and repo, which is about as safe as a portfolio gets. Prime funds hold commercial paper and corporate obligations, which carry more credit risk; the Reserve Primary Fund famously "broke the buck" in 2008 after Lehman's default, and the SEC has since imposed liquidity fee and redemption gate provisions on institutional prime funds. Government funds have not had this problem.

Money market fund yields typically track short-term rates more closely and more quickly than bank savings rates, since the fund simply passes through what its holdings earn minus the expense ratio. In a rising-rate environment they often lead; in a falling one they often fall faster.

Treasury Bills

Short-term US government debt with maturities of 4, 8, 13, 17, 26, and 52 weeks. Purchased at a discount and redeemed at face value; the difference is the interest.

They can be bought at auction directly through TreasuryDirect with no fee and a $100 minimum, or on the secondary market through a brokerage. Brokerage purchase is generally more convenient — the bills sit alongside other holdings, and selling before maturity is straightforward.

Held to maturity, a T-bill has no price risk: the redemption value is known at purchase. Sold before maturity, it is subject to market pricing, though for a bill with weeks remaining the movement is small.

A T-bill ladder — buying 4-week or 13-week bills on a rolling schedule so one matures regularly — combines the yield and tax treatment of Treasuries with near-continuous access. This is the structure most often used for the outer tier of a large emergency fund.

Certificates of Deposit

A fixed rate for a fixed term, FDIC insured on the same terms as a savings account.

The one thing a CD does that nothing else on this list does is lock a rate. When short-term rates are expected to fall, a 12- or 24-month CD preserves today's yield through the decline. That is a genuine and specific benefit — and the mirror image of its cost, since a CD locked before a rate increase underperforms.

Early withdrawal penalties typically run three to twelve months of interest. Note that the penalty applies to interest, not principal, so a CD held long enough that accrued interest exceeds the penalty cannot lose principal — though very early withdrawal from a long CD can.

Brokered CDs, purchased through a brokerage, differ meaningfully: instead of an early withdrawal penalty, they are sold on a secondary market at whatever price it offers, which introduces genuine price risk. They often carry higher yields and make it easier to spread balances across multiple banks for insurance coverage.

A CD ladder — equal amounts maturing at staggered intervals, each rolled into a new longest-term CD — produces a blended rate that captures term premium while keeping a portion maturing regularly.

Series I Savings Bonds

Inflation-linked savings bonds from the Treasury. The composite rate combines a fixed rate, set at purchase and locked for the bond's life, with an inflation rate that resets every six months based on CPI-U.

The constraints are significant: $10,000 per person per calendar year electronically, purchasable only through TreasuryDirect, completely illiquid for the first 12 months, and subject to a three-month interest penalty if redeemed before five years.

Where they fit: money with a horizon beyond a year that is specifically meant to hold its purchasing power. The federal tax deferral until redemption is a real advantage, and the state exemption applies. What they are not is emergency money — a 12-month lockup disqualifies them for that role by definition.

Matching Vehicle to Horizon

The general principle is that a longer horizon permits accepting more term risk, and that the vehicle should mature at or before the moment the money is needed. A down payment planned for eighteen months from now sitting in a 5-year CD or a bond fund has taken on risk that the horizon does not require.

What Not to Do

Reaching for yield. Products advertising materially above prevailing short-term rates are compensating for something: credit risk, duration risk, a promotional period that expires, or a balance cap above which the rate collapses. Reading the terms rather than the headline rate is the whole defense.

Ignoring insurance limits. FDIC coverage is $250,000 per depositor, per insured bank, per ownership category. Balances above that at a single institution are uninsured. Coverage can be multiplied legitimately through joint accounts, multiple institutions, or network deposit services that spread balances across banks. Treasuries carry no such limit — they are backed by the issuer of the currency.

Confusing SIPC with FDIC. SIPC protects against a brokerage failing while holding your securities; it does not protect against the securities losing value. A money market fund at a brokerage is covered by SIPC in the event the brokerage fails, and not at all against the fund itself declining.

Holding too much. Cash beyond what the horizon requires has a real opportunity cost. The point of matching vehicle to horizon is that money with a long horizon should generally not be in these vehicles at all.

Frequently Asked Questions

Is a money market fund the same as a money market account? No, and the naming is unhelpful. A money market account is a bank deposit product, FDIC insured, with a bank-set rate. A money market fund is a mutual fund, not insured, holding short-term securities. They frequently pay different rates and have different risk characteristics.

How is T-bill interest reported? On Form 1099-INT, in box 3 — "Interest on U.S. Savings Bonds and Treasury obligations" — which is the box state tax software uses to exclude it. Reporting it in the wrong box is a common preparation error that silently forfeits the state exemption.

Are Treasuries actually risk-free? They carry no meaningful credit risk and are the conventional benchmark for a risk-free rate. They do carry interest rate risk if sold before maturity, and inflation risk — a 4% nominal yield is a negative real return if inflation runs 5%. Risk-free refers narrowly to default.

Should the emergency fund be split across vehicles? A tiered structure is common: one month of expenses in immediately accessible cash, several months in a high-yield savings account or money market fund, and the remainder in a T-bill or CD ladder. The friction on the outer tier is a feature — it discourages spending emergency money on non-emergencies.

Does any of this belong in a retirement account? Cash held inside an IRA or 401(k) loses the state tax distinction entirely, since the account shelters income either way — which means the Treasury advantage does not apply there. Holding significant long-term cash inside a tax-advantaged account is also generally an inefficient use of scarce contribution room. See asset location.

This content is for educational and informational purposes only and does not constitute financial, tax, or investment advice. Equity Rank is not a registered investment adviser. Yields shown are illustrative examples for computing tax-equivalent comparisons, not current quotes or offers. Insurance limits, tax treatment, and product terms change; verify with the institution and with current IRS and state guidance.