T-bills vs HYSA vs money market funds: the after-tax math (2026)

The three primary vehicles a US household has available for holding short-term cash above what fits in a checking account are: a high-yield savings account at an online bank, a money market mutual fund at a major brokerage, and direct holdings of Treasury bills (either purchased on TreasuryDirect or through a brokerage). The three are functionally similar — all offer yields close to the federal funds rate, all are highly liquid, all carry minimal credit risk — and they differ in three meaningful ways that affect the right choice for a specific household: the exact yield available, the federal and state tax treatment of the interest, and the operational friction of moving cash in and out of the vehicle.

This comparison walks through how each vehicle works, the actual yield differences in the current rate environment, the tax structure that often dominates the after-tax comparison for households in high-tax states, the protection mechanisms (FDIC versus SIPC versus direct Treasury obligation), and the situations where each is the right answer.

The short answer: All three hold short-term cash safely at yields near the federal funds rate — a target range of 3.50%–3.75% since the July 2026 FOMC hold — so the deciding factor is usually tax, not headline yield. T-bill interest is exempt from state and local income tax under 31 U.S.C. §3124(a); HYSA and money market fund income is fully taxable. For a resident of a high-tax state, that exemption often makes T-bills win on an after-tax basis even when a HYSA shows a higher headline APY. HYSAs carry FDIC insurance up to $250,000; money market funds and T-bills do not, though T-bills are direct US government obligations.

What each vehicle is and how it actually works

High-yield savings account. A deposit account at a US bank, almost always an online-only or online-first institution, that pays a yield meaningfully above the rates offered by traditional brick-and-mortar banks. The deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per insured bank per ownership category. The account is operationally a bank account: deposits and withdrawals go through standard Automated Clearing House (ACH) transfers, the account is linked to the household’s primary checking account at the same or a different bank, and transfers typically take 1-3 business days. Interest is paid monthly, taxed as ordinary income at both the federal and state levels. The yield is set by the bank and can change at any time; banks typically adjust rates within days of any Federal Reserve rate change but in either direction.

Money market mutual fund. An open-end mutual fund that invests in very short-duration high-quality debt instruments — Treasury bills, repurchase agreements collateralized by Treasury securities, commercial paper, certificates of deposit at major banks. The fund is structured to maintain a stable net asset value of $1.00 per share (with rare exceptions during severe market stress, where some funds have “broken the buck” — a $0.97 valuation event that has happened twice in modern US history). The fund is held at a brokerage account and is liquid on a same-day basis at the brokerage; transferring the cash to an external bank takes 1-2 business days via ACH from the brokerage. Dividends are paid daily and credited monthly. The fund is not FDIC-insured but is SIPC-protected against broker failure (not against fund losses); the underlying credit quality of the fund’s investments is the actual risk.

Treasury bills (direct holding). Short-duration Treasury debt with maturities of 4, 8, 13, 17, 26, or 52 weeks, purchased either at TreasuryDirect.gov (the Treasury’s direct retail platform) or through a brokerage that offers Treasury auction participation (most major brokerages do). The bill is held to maturity (or sold on the secondary market) and the difference between the discounted purchase price and the par value at maturity is the interest income. The bills are obligations of the US Treasury and carry no credit risk in any meaningful sense. Interest is paid only at maturity (or implicit in the secondary-market price); the bill is liquid via secondary-market sale at a brokerage with a typical 1-2 day settlement, but the early sale produces a price that fluctuates with market rates rather than the guaranteed yield to maturity.

The three vehicles are designed for the same fundamental purpose — holding cash safely at the highest possible yield — and differ in mechanics, tax treatment, and protection.

Yield comparison — what the rates actually look like

In the rate environment of mid-2026, with the federal funds target range held at 3.50% to 3.75% after the July FOMC meeting, the three vehicles produce yields that cluster within a relatively narrow band just below that ceiling:

High-yield savings accounts at the most-competitive online banks (Marcus, Ally, SoFi, Wealthfront, Capital One 360, Discover) typically pay within roughly half a point of the policy rate. That is the exception, not the norm: the FDIC’s national average savings rate sits at just 0.38% (July 2026 reading), a 3-point gap that makes the choice of bank matter far more than the Fed’s next quarter-point move — the savings rate gap runs that arithmetic monthly. The yield is set by the bank and adjusts over a period of weeks after a Federal Reserve rate change. The promotional rates that some banks offer for new customers revert to the standard rate after the promotional window.

Money market mutual funds at the major brokerages sit within a few basis points of the policy rate — and despite the name, these are SEC-regulated investment funds, not the FDIC-insured bank money market accounts they are routinely confused with. Vanguard’s Federal Money Market Fund (VMFXX), Fidelity’s SPAXX and FZFXX, Schwab’s SWVXX, and Vanguard’s Treasury Money Market Fund (VUSXX) all sit in this range. The yield is the seven-day SEC-required yield published by the fund and adjusts essentially in real time with the federal funds rate.

Treasury bills yield close to the federal funds rate — with the target range at 3.50% to 3.75%, bill yields cluster just below it, and the spread between short and long maturities reflects where the market expects the Fed to go next. The yield is locked at purchase for the bill’s full term.

The differences across the three are typically 20 to 50 basis points (0.20 to 0.50 percentage points), with money market funds and Treasury bills usually slightly ahead of high-yield savings accounts because the underlying instruments produce the yield directly without a bank intermediating the rate.

Tax treatment — where the comparison frequently inverts

The federal income tax treatment of all three vehicles is the same: interest income is taxed as ordinary income at the household’s marginal rate. The state and local tax treatment, however, differs in a way that frequently changes the ranking for households in high-tax states.

High-yield savings account interest is fully taxable at both federal and state levels. A household in California (top marginal rate 9.3% for moderate-income brackets, 13.3% for high earners) pays state tax on the full interest income.

Money market mutual fund dividends are taxable at the federal level as ordinary income. The state-level taxation depends on the fund’s underlying composition. A fund that holds entirely Treasury securities (Vanguard’s Treasury Money Market Fund VUSXX is the cleanest example) produces dividends that are largely exempt from state and local tax, because the underlying interest is on US Treasury obligations and the state-tax exemption flows through to the fund shareholders. A fund that holds a mix of Treasury and non-Treasury instruments (Vanguard’s VMFXX, Fidelity’s SPAXX) produces partial state-tax exemption based on the fraction of fund income from Treasury sources — typically 60-80% in normal market conditions.

Treasury bill interest is taxable at the federal level as ordinary income and exempt from all state and local income taxes. The exemption is a structural feature of the Treasury’s special status under federal-state tax coordination, not a special tax-advantage program.

The implication for households in high-tax states is that the after-tax yield on Treasury bills (or a Treasury-only money market fund) frequently exceeds the after-tax yield on a high-yield savings account by 0.30 to 0.50 percentage points, even when the pre-tax yields are similar.

A worked calculation. A California household in the 9.3% state marginal bracket holds $50,000 in a comparison position:

• High-yield savings at 3.5%: interest income $1,750, state tax $163, after-state-tax yield $1,587 = 3.17% effective.
• Treasury money market (VUSXX) at 3.5%: assume 90% state-tax-exempt. Taxable state portion is $175, state tax is $16, after-state-tax yield is $1,734 = 3.47% effective.
• Treasury bills at 3.6%: $1,800 interest, $0 state tax, after-state-tax yield is $1,800 = 3.60% effective.

The state-tax exemption alone is worth 33 basis points to this California household at an identical 3.5% headline rate, and the general conversion is simple: divide the T-bill yield by (1 − your state marginal rate) to find the HYSA APY it matches. For a 9.3% Californian, a 3.5% T-bill matches a 3.86% HYSA — and a 4.0% T-bill would match a 4.41% HYSA. Over a decade on a $50,000 position, the difference is real money.

For households in low-tax or no-income-tax states (Texas, Florida, Washington, Nevada, Tennessee, Wyoming, Alaska, South Dakota, New Hampshire on wages), the state-tax exemption is worth nothing. The yield comparison simplifies to the pre-tax yields, and the three vehicles are roughly comparable.

For households in moderate-tax states (Illinois, Michigan, Pennsylvania, Indiana, Ohio), the state-tax exemption is worth roughly 10 to 20 basis points at current yields — meaningful but not dramatic.

Protection mechanisms — FDIC, SIPC, and direct Treasury

The three vehicles have different structural protection against the failure of the institution holding the money.

FDIC insurance on high-yield savings accounts. The Federal Deposit Insurance Corporation insures deposits at insured US banks up to $250,000 per depositor per insured bank per ownership category. The “per ownership category” detail matters: a household with a joint account and two individual accounts at the same bank has multiple insurance buckets, not one. The $250,000 limit is generous enough that most households’ emergency funds fit comfortably; households with savings exceeding the limit can split across multiple FDIC-insured banks for additional coverage. The FDIC has paid 100% of insured deposits in every US bank failure since its creation in 1933.

SIPC insurance on money market mutual funds. The Securities Investor Protection Corporation provides limited protection against the failure of a brokerage firm, not against losses in fund investments. SIPC covers up to $500,000 in securities and cash per account at a SIPC-member broker, with a $250,000 sublimit on cash positions. The protection applies only if the broker fails and customer assets are missing; it does not apply to investment losses in the funds themselves. For money market funds, the underlying credit risk is the actual exposure: a fund that holds high-quality Treasury and agency securities has minimal credit risk; a fund that holds lower-quality commercial paper has somewhat more.

Direct Treasury obligation on Treasury bills. Treasury bills are direct obligations of the US Treasury, backed by the full faith and credit of the US federal government. The protection is the absence of credit risk: a Treasury bill held to maturity will be repaid in full unless the US government defaults on its debt obligations, which has not happened in modern US history. The Treasury’s protection is structurally stronger than FDIC or SIPC because there is no intermediating institution that could fail.

The protection differences are mostly theoretical for amounts under $250,000. FDIC, SIPC (for the modest portion of a typical brokerage account that holds cash), and direct Treasury all provide essentially equivalent protection at typical household scale. The differences become more meaningful for larger balances (above $250,000 in a single account), where the FDIC limit constrains high-yield savings account placement and the Treasury alternative becomes more attractive.

Operational friction — what it takes to actually move the money

The three vehicles differ in the operational complexity of holding and transferring cash.

High-yield savings account. Operationally the simplest. The account is linked to the household’s primary checking account through ACH; transfers in and out take 1-3 business days. Interest is credited monthly automatically. Tax reporting is a single Form 1099-INT at year-end. No ongoing administration is required.

Money market mutual fund at a brokerage. Slightly more complex but still straightforward. The cash sits in the brokerage’s default sweep position (which may or may not be the highest-yielding money market option at that brokerage — verifying this at account opening matters). Transfers between the money market fund and the brokerage’s bank-affiliated checking option are instant; transfers to an external bank take 1-2 business days via ACH. Tax reporting is a Form 1099-DIV at year-end, with the fund’s monthly dividend statements documenting the interest. The brokerage account also enables direct purchase of other investments without an additional transfer, which is convenient for households doing periodic investing.

Treasury bills via TreasuryDirect. Operationally the most complex. The household has to set up a TreasuryDirect account (the user interface is dated; the verification process can take a few days). Bill auctions occur on a published weekly schedule; the household submits a noncompetitive bid before the auction deadline and receives the auction-clearing yield. Bills auto-roll at maturity to a new bill of the same term, or proceed to the linked bank account if the auto-roll is disabled. Selling a bill before maturity requires transferring the bill to a brokerage first, which is a multi-day process. Tax reporting is a Form 1099-INT for the year of maturity (with accrued interest reported in the year of maturity, not the year of purchase).

Treasury bills via brokerage. Operationally between the two. The brokerage’s bond desk handles the auction submission; the bill appears in the brokerage account immediately after the auction. Selling before maturity is straightforward via the brokerage’s secondary-market interface. Tax reporting is a Form 1099-INT from the brokerage at year-end.

The operational friction differences favor high-yield savings accounts for households that want minimal administration, money market funds at a brokerage for households already maintaining a brokerage relationship, and Treasury bills via brokerage for households that prioritize the state-tax exemption and are comfortable with brokerage-level administration. For the inflation-protected piece of the cash allocation that does not need to be liquid inside one year, the Series I savings bond guide covers a complementary vehicle the three options here do not provide.

When each one is the right answer

The decision rule that emerges from the comparison:

High-yield savings account is the right answer when the household values operational simplicity above marginal yield, the balance is well under the FDIC $250,000 limit, the household is in a low- or no-income-tax state, and the funds need to be accessible on a 1-3 business day timeline. Most households’ first cash position fits this description.

Money market mutual fund (Treasury-tilted) is the right answer when the household has an existing brokerage relationship and values keeping cash in the same custodian as other investments, when the household is in a moderate or high state-tax bracket and benefits from the partial state-tax exemption of a Treasury fund, when the household values same-day liquidity within the brokerage (e.g., for periodic investment purchases). Most households doing systematic investing fit this description.

Direct Treasury bills are the right answer when the household is in a high state-tax bracket and the full state-tax exemption is worth optimizing for, when the balance is large enough that the operational overhead is worth the marginal yield improvement (typically $50,000 and up), when the household is comfortable with the discipline of laddering bills across maturities to maintain rolling liquidity. High-net-worth households in California, New York, and similar states frequently use Treasury bills as the primary cash vehicle for this reason.

For most households, the answer is a combination: a high-yield savings account for the immediate-liquidity portion (the first 1-2 months of expenses), a Treasury money market fund at a brokerage for the next several months, and possibly direct Treasury bills for the upper tier of a larger emergency fund. The combination optimizes operational simplicity at the immediate-access layer and tax efficiency at the larger-balance layer.

Sources

• Federal Reserve interest rate decisions and current target rate: Federal Reserve — Open Market Operations.
• High-yield savings account yields tracked daily: DepositAccounts.com and Bankrate.
• Money market mutual fund mechanics, including the seven-day yield: SEC — Money Market Funds.
• Treasury bill auction schedule and direct purchase: TreasuryDirect — T-Bills.
• State-tax exemption on Treasury interest income (31 U.S.C. § 3124(a) — “Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State”): see Cornell Law — 31 U.S.C. § 3124.
• FDIC insurance details: FDIC — Deposit Insurance.
• SIPC protection details: SIPC — How SIPC protects you.

If a rate on this page looks off against current market conditions, the comparison sites above update daily; let us know via contact and we will reconcile.