Money Market vs Savings vs T-Bills: Your State Tax Decides

Three places to park cash you might need this year: a high-yield savings account, a government money market fund, and Treasury bills. Right now they all quote roughly the same thing. On September 4, 2026, the 4-week bill was at a 3.72% coupon equivalent and the 26-week bill at 4.01%.^[6] A competitive online savings account sits in the same neighborhood. A government money market fund holds bills and repo, so its yield is basically the bill yield minus the expense ratio.

Which means the comparison everybody writes, the one that lines up three APYs in a table and declares a winner, is comparing numbers that are almost identical. It is the wrong table. The three products differ on what backs them, on how fast you can get out, and, most of all, on how the interest is taxed. That last one is worth real money and I have almost never seen it quantified.

What actually stands behind each dollar

Start with the backing, because that is the part people get wrong from the names alone. A bank money market deposit account and a money market mutual fund sound like the same product and are not remotely the same product.

The FDIC number is $250,000 per depositor, per insured bank, for each account ownership category.^[1] Three qualifiers, and people drop all three. Single accounts, joint accounts, certain retirement accounts and trust accounts are separate categories, so a couple can hold far more than $250,000 at one bank and still be fully covered. The FDIC is equally explicit about what it does not touch: mutual funds, stocks and bonds, annuities, crypto.^[1]

The $1.00 that is a convention, not a promise

A government money market fund holds cash, government securities and fully collateralized repurchase agreements, and it prices its shares at a flat $1.00. It gets to do that because SEC Rule 2a-7 lets government and retail funds use amortized cost valuation. That permission was deliberately taken away from one category of fund in 2014.

Treasury bills pay you by not charging you full price

Bills come in 4, 6, 8, 13, 17, 26 and 52 week terms, minimum $100, in $100 increments.^[3] The shorter terms auction weekly; the 52-week auctions every four weeks.^[3] There is no coupon. You buy at a discount and get paid face value at maturity, and the difference is your return.^[3]

And here is the line that decides everything downstream. IRS Publication 550 puts it plainly: interest on U.S. Treasury bills, notes, and bonds is subject to federal income tax but is exempt from state and local income taxes.^[10] It is not an IRS courtesy either. It is statute. 31 U.S.C. 3124 says stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State, with narrow carve-outs for corporate franchise taxes and for estate and inheritance tax.^[9] If you want the broader mechanics of how a debt instrument pays you, the piece on what bonds are and how they actually work covers the coupon side that bills deliberately skip.

The arithmetic nobody runs

Take $50,000 parked for a year. Assume all three products quote the same 3.75%, so gross interest is $1,875 in every case. Assume a 24% federal marginal rate. Now run it twice: once for someone in California at a 9.3% marginal state rate, once for someone in Texas at zero.

Flip the question around and it gets sharper. What does the savings account have to pay to tie? Take what the Treasury keeps after federal tax, then divide by what a taxable account keeps after both taxes. This is the same no-SALT-deduction assumption the table above uses, which is the right default for most filers under the SALT cap.

taxable_equivalent = treasury_yield * (1 - federal) / (1 - federal - state)

3.75% * 0.76 / (1 - 0.24 - 0.093)  = 4.27%   California, 9.3% bracket
3.75% * 0.76 / (1 - 0.24 - 0.133)  = 4.55%   California, 13.3% top bracket
3.75% * 0.76 / (1 - 0.24 - 0.000)  = 3.75%   Texas, Florida, Nevada, Washington

So a 3.75% T-bill is a 4.27% savings account to that California filer, and a 4.55% savings account to someone in the top state bracket. Go look at what the best online savings accounts are actually quoting and ask whether any of them are 80 basis points above the six-month bill. They are not, and they never are for long, because the bank has to earn a spread and the Treasury does not.

The money market fund case is state-dependent in a second way

A government money market fund earns some of its income from direct Treasury obligations and some from repo. Only the direct Treasury share is a candidate for state exemption, and whether you can claim any of it depends on your state's rules for the fund itself. California is the strict example: under Revenue and Taxation Code section 17145, a fund can pay exempt-interest dividends only if at the close of each quarter at least 50% of the value of its total assets consists of obligations whose interest would be exempt in the hands of an individual.^[11]

Miss the asset test at one quarter-end and the pass-through is gone for the year, even though the underlying bills were exactly as exempt as they ever were. That is why the fund column in the chart above sits between the other two and why it moves around. Every January your fund family publishes a percentage-of-income-from-government-obligations letter, and that letter, not the fund name, decides what you owe.

Getting your money back out

This is where the T-bill argument gets a real counterweight, and where the emergency-fund conversation lives. Money in a savings account moves by ACH. Money in a money market fund at a broker can usually be traded against the same day and swept out shortly after. A Treasury bill has a maturity date, and TreasuryDirect enforces it hard.

Read that twice. A 4-week bill bought on TreasuryDirect is a 28-day lockbox with no early exit at all. Buy the same bill through a brokerage and you can sell it on the secondary market any business day, at whatever the market pays, which can be less than you paid if rates moved against you. Same instrument, completely different liquidity, purely because of where you hold it. This is the single most common surprise for people moving an emergency fund into Treasury bills, and it is a good reason to keep the first tier of that fund in a savings account and ladder only the rest.

The auto-roll, and its limits

TreasuryDirect will reinvest a maturing bill into the same term, but you have to schedule it and it is capped. You get up to 25 reinvestments on a 4-week bill, 7 on a 13-week, 3 on a 26-week, and exactly 1 on a 52-week, which works out to about two years of rolling in every case. The option closes four business days before the relevant auction, and it never happens on its own.^[5] If no suitable security exists at maturity, the reinvestment is canceled and the cash goes back to your bank account.^[5]

So what would I actually do

Honestly, the answer is boring, and I think the boringness is the point. Keep one to two months of expenses in a savings account at a real online bank, because instant access is worth more than 35 basis points when the water heater goes. Put the rest in bills or a government money market fund, and let your state pick which one. In a no-tax state, take whichever is more convenient, and that is usually the fund. In California, New York or New Jersey, take the bills.

What frustrates me about the standard version of this comparison is that it treats yield as the variable and everything else as a footnote, when the yields are the one thing that are already the same. Your state marginal rate is a number you already know. It takes about eight seconds to divide by one minus it. Do that before you read another APY table. If you want the next layer of this, the pieces on how investment income is actually taxed and on tokenized Treasuries as a savings alternative both start from the same premise: the wrapper around an asset changes what you keep, and nobody puts the wrapper on the marketing page.

One last thing worth saying out loud. None of this is advice about your situation, and every number here is a rate on a specific date that has already moved. The method survives; the numbers do not. And when inflation runs near these yields, the whole comparison is really about which of three ways to lose a little purchasing power you dislike least.