The Cash Equivalent Map

Which of these are you?

• You want the money safe and simple, and it is under $250,000 per category at a bank. Use an insured savings or money market account. Nothing else on this map beats it on principal risk.
• You already hold cash at a brokerage. A government money market fund is the natural home. Know that it is not insured, and read the next section on what protects it.
• You live in a state with an income tax and hold a large balance. Run the after-tax math below. A lower Treasury yield can beat a higher bank yield once state tax is counted.
• You know the date you will need the cash. A CD or a Treasury bill maturing on that date removes reinvestment risk. See Chapter 3 before you commit money you might need early.

The map: six instruments on five axes

Every cash equivalent trades something for something else. The table lists what each one is, not what it currently pays. For today's rates use the live rate pages on SwitchWize.

The cells below need explanation.

Bank deposits: the insured default

A high-yield savings account and a bank money market account are both deposits, and both are insured up to the limits in Chapter 4. The differences are mostly in how you reach the money. The Federal Reserve deleted the six-per-month transfer limit from Regulation D's definition of a savings deposit in April 2020, but the Fed noted that the change does not by itself change a bank's account agreement: a bank can still set its own limits or fees. Check the agreement for withdrawal limits, minimum balances and fees, then compare accounts with money market account vs savings account and high-yield savings vs money market.

Chapter 4 deep diveFDIC and NCUA Insurance: Getting Past $250,000Insurance is per bank and per ownership category, so the balance you can park in a deposit account without risk is a number you can compute.

Money market funds: what protects you, and what does not

A money market fund is an SEC-registered investment fund, governed by Rule 2a-7 under the Investment Company Act. It is not a bank deposit. The FDIC says its insurance covers deposits and not investments, even those bought at an insured bank.

Rule 2a-7 distinguishes three kinds of fund that matter to a saver.

• Government funds invest at least 99.5 percent of total assets in cash, government securities and fully collateralized repurchase agreements. They may use amortized cost or penny-rounding to keep a stable share price.
• Retail funds limit beneficial owners to natural persons and may also keep a stable share price.
• Institutional funds, meaning those that are neither government nor retail, must price shares by rounding the net asset value to at least the fourth decimal place. That means the share price floats.

The 2023 SEC reforms tightened all three. The commission raised minimum daily liquid assets to at least 25 percent of total assets and weekly liquid assets to at least 50 percent. It removed funds' ability to suspend redemptions with gates, and removed the tie between a fund's liquidity level and its ability to charge a liquidity fee. Institutional prime and institutional tax-exempt funds must impose a mandatory liquidity fee when daily net redemptions exceed 5 percent of net assets, unless the fund's liquidity costs are de minimis. Any non-government fund's board can impose a discretionary fee. The SEC gave funds a 12-month transition for the mandatory fee.

A hypothetical shows the trigger. An institutional prime fund with $10,000,000,000 in net assets sees $600,000,000 of net redemptions in one day. That is 6 percent, above the 5 percent threshold, so the fee applies unless liquidity costs are de minimis. A retail investor in a government fund is not exposed to that mechanism, which is one reason government funds are the usual choice for a household's cash.

Treasury bills: fixed, federal, and state-exempt

A Treasury bill is sold at a discount and pays face value at maturity, so the interest arrives as a lump sum at the end. TreasuryDirect offers terms of 4, 6, 8, 13, 17, 26 and 52 weeks, with a minimum purchase of $100 and federal tax due on the interest. It lists no state or local taxes on bill interest, and 31 U.S.C. § 3124 exempts obligations of the United States from state and local taxation, with exceptions for franchise taxes and estate or inheritance taxes.

Selling early is where a bill differs from a bank deposit. TreasuryDirect states that you must work through a bank, broker or dealer to sell, and that a security bought in TreasuryDirect must be held there for 45 days before it can be sold or transferred, so a 4-week bill cannot be sold from TreasuryDirect at all. Held to maturity, a bill pays its face value. Sold early, the price is whatever the market pays that day. The full mechanics, including discount-rate and coupon-equivalent yield, are in Chapter 14.

Chapter 14 deep diveTreasury Bills vs CDsDiscount yield, coupon-equivalent yield, auctions and TreasuryDirect versus a brokerage.

CDs: the rate you can lock

A CD is an insured deposit with a fixed rate and a fixed term. What you give up is access: withdrawing early costs a penalty. What you get is a rate that cannot be reduced during the term, which the other instruments cannot offer. Penalty mechanics and the break-even math are in Chapter 3.

Chapter 3 deep diveCD Anatomy and the Early Withdrawal PenaltyThe penalty, and the replacement rate at which breaking a CD pays.

The state-tax test for Treasury money funds

The state exemption for Treasuries does not automatically pass through a fund. States decide what to do with dividends from a fund that holds Treasuries, and some apply an asset test.

New York allows the subtraction for a fund's dividends attributable to interest on federal obligations only if the fund meets the 50 percent "U.S. Obligations" asset requirement under section 612(c)(1) of the Tax Law, and its regulation, 20 NYCRR 112.3, measures 50 percent of total assets at the close of each quarter of the fund's taxable year. Connecticut applies a parallel rule: at the close of each quarter, at least 50 percent of the fund's assets must be obligations Congress has prohibited states from taxing for the dividends to be exempt. Both states are clear that repurchase agreements do not qualify. New York's list treats interest on repurchase agreements on U.S. government obligations as subject to New York tax, and Connecticut's Policy Statement 2005(2) says interest paid by a seller at repurchase is not interest on U.S. government obligations.

Government money funds hold repo, so a fund can be 100 percent "government" for the SEC's 99.5 percent test and still have a state-exempt share well below 100 percent. The fund sponsor can tell you the share of its dividends that comes from state-exempt obligations, so ask for that figure. Two cautions: the New York memo on repurchase agreements is dated 1996, so confirm current guidance with each state's revenue department, and other states apply their own tests.

After-tax math on $100,000

The question: which pays more after state tax, a bank account or a Treasury fund? Hypothetical inputs, not current rates: a bank at 5.00 percent, a fund at 4.60 percent whose income is fully state-exempt, and a combined state and local rate of 10 percent. Federal tax applies equally to both and is left out.

After-state-tax yield = Yield x (1 - State rate); Tax-equivalent yield = Exempt yield / (1 - State rate)

Yield

Taxable bank yield (federal tax applies to both options)

State rate

Combined state and local marginal income tax rate

Exempt yield

Yield on a state-tax-exempt Treasury

1. 1. Bank yield after state tax5.00% x (1 - 10.0%)4.50%
2. 2. Taxable yield needed to match the Treasury4.60% / (1 - 10.0%)5.11%

The Treasury wins after state tax: 4.60% against 4.50% from the bank.

Taxes and any fees are excluded unless a step says otherwise. Change the inputs in the calculator to see your own numbers.

On $100,000, the bank keeps 4.50 percent, or $4,500, after state tax. The exempt fund keeps its full 4.60 percent, or $4,600. The fund wins by $100 a year despite the lower headline rate, and the bank would need to pay 5.11 percent to tie.

Now let the exempt share vary. If a fraction s of the fund's income is state-exempt, and the state's asset test is met (s at least 50 percent), the after-state-tax yield is:

After-state-tax yield = y x (1 - t x (1 - s))

where y is the fund's yield, t is the state rate and s is the exempt share. If the test is not met, s is treated as zero.

The break-even exempt share solves y x (1 - t x (1 - s)) = 4.50 percent. With y = 4.60 percent and t = 10 percent, s = 78.3 percent. A fund holding mostly repo and agency paper can miss that by a wide margin, and a fund that misses the state's 50 percent test loses the exemption entirely. The decision number is the fund's reported exempt share for your state, not the word "Treasury" in its name.

Bank interest versus state-exempt Treasury interest

Example inputs: replace with yours

Bank CD or savings yield

%

Treasury bill yield

%

Combined state and local rate

%

Bank yield after state tax

4.54%

Taxable yield needed to match the Treasury

4.96%

Higher after state tax

Bank

Run the full state tax comparison

Federal tax applies to both, so this compares only the state and local layer. Treasury interest is exempt from state and local income tax (31 U.S.C. § 3124). Use your combined marginal state and city rate. Treasury money funds may pass the exemption through only above a state-set threshold, so this applies to Treasury bills held directly.

Chapter 15 deep diveState Tax: Why Treasury Interest Can Beat a Higher CD RateCombined state and local rates, federal deductibility caveats, and state-by-state examples.

Compare your own three numbers

Enter your own balance, rates and tax rate. The calculator cannot see what a fund actually holds or what a bank will pay in three months, so treat its output as an estimate.

Prime funds and ultra-short funds

A prime money fund buys corporate and bank paper in addition to government securities, and the extra yield pays for credit and liquidity risk. Institutional prime funds float their price and must charge the mandatory liquidity fee described above. Ultra-short bond funds are a step further: they are not money market funds, are not bound by Rule 2a-7, and can lose principal. Their tradeoffs are in Chapter 17, and the existing guide on FFRHX, JAAA and SGOV walks through three specific names.

Chapter 17 deep diveUltra-Short Bond Funds and Prime Money FundsWhat extra yield pays for: NAV volatility, credit risk and liquidity fees.

Putting each dollar somewhere

Use the tier framework from Chapter 2 to decide how much belongs in each place, then match the instrument to the tier.

Chapter 2 deep diveThe Three-Tier Liquidity FrameworkHow much belongs in each tier before you choose where each tier sits.

Rates move, so this chapter does not print any. Right now the best CD APY we track is 4.50%%, and the best bank money market account APY is 4.05%%. These come from our daily rate data and are shown for orientation only; they are not a recommendation to hold either.

The rule to carry away

Insurance and backing decide principal risk, access decides which tier a dollar can sit in, and tax decides the ranking among the survivors. If two options tie on the first two, do the state-tax arithmetic with the fund's actual exempt share. If you cannot get that number, treat the fund's yield as fully taxable at the state level and compare on that basis.