After-tax yield: the real ranking of cash vehicles

Two cash vehicles advertise 4.10% and 3.95%. Which pays more? For a high earner in California, it's very possibly the second one — because the question that matters is never the advertised yield, it's the yield after federal and state taxes take their cut, and different vehicles are taxed differently. Bank interest is fully taxable at both levels. Treasury interest is federal-only. Municipal money market funds are often federal-exempt and sometimes state-exempt too. Once you're holding meaningful cash — $30,000, $50,000, a house down payment in waiting — ranking vehicles by sticker APY instead of after-tax yield is leaving real money on the table every single year, in exchange for skipping five minutes of arithmetic.

The one formula: tax-equivalent yield

After-tax yield = advertised yield times (1 minus the tax rates that actually apply). To compare across vehicles, convert everything to the same basis. A fully taxable HYSA at 4.10% for someone in the 32% federal bracket and a 9.3% state bracket keeps 4.10% x (1 - 0.32 - 0.093) = 2.41%. A T-bill at 4.30% — exempt from state tax — keeps 4.30% x (1 - 0.32) = 2.92%. A muni money market fund at 2.90%, exempt from federal tax (and from state tax if it's a single-state fund matching your state), keeps up to the full 2.90%. The 'lowest' sticker rate just won by half a point. Run the same numbers for a 12%-bracket saver in Texas — no state tax — and the HYSA wins instead. There is no universal ranking; there is only your ranking.

Notice the pattern in the table: as your combined tax rate climbs, the ranking inverts. Low-bracket savers should almost always take the highest sticker yield and ignore the exotic options. High-bracket savers in high-tax states live in a different universe, where a muni fund yielding 'only' 2.90% beats a HYSA yielding 4.10%. The crossover math is worth doing once and re-doing when rates or your bracket move meaningfully.

Know your real marginal rates

• Federal marginal rate: the bracket your last dollar of income falls in — not your average rate. Interest income stacks on top of wages, so it's taxed at your top bracket.
• State marginal rate: zero in nine states, over 9% at the top in California, New York, and a few others. This single variable drives most of the re-ranking.
• Net Investment Income Tax: an extra 3.8% federal on investment income above $200k single / $250k married AGI — it applies to interest and quietly sharpens every exemption's value.
• The exemptions map: bank/CD/MMF interest — taxed by everyone. Treasuries (bills, notes, most Treasury MMFs) — federal yes, state no. National muni funds — federal no, state usually yes. Single-state muni funds — potentially neither.

The Treasury money market subtlety

Money market funds hide a trap and an opportunity. Government and Treasury MMFs differ: state tax exemption flows through only on the portion of the fund's income derived from actual Treasury obligations, and funds vary from 30% to nearly 100% Treasury-derived. Each January, fund companies publish the percentage; your state exemption applies to that fraction. A 'Government' MMF heavy in repurchase agreements may pass through very little exemption, while a pure Treasury-only fund passes through nearly all of it. Some states (California, New York, Connecticut) also impose a threshold — commonly, at least 50% of the fund's assets must be in exempt securities for any pass-through at all. If you're choosing an MMF for state-tax reasons, read the fund's prior-year percentage first, not just its name.

1. 1
   Compute your combined marginal rate on interest

   Federal bracket + state bracket + 3.8% NIIT if applicable. Write it down — call it R. Everything else is one multiplication.

2. 2
   Convert every candidate to after-tax yield

   Fully taxable: yield x (1 - R). State-exempt: yield x (1 - federal part). Federal-exempt: yield x (1 - state part). Double-exempt: yield unchanged.

3. 3
   Rank, then sanity-check liquidity

   The winner must still match the money's job — a T-bill ladder is fine for a 12-month reserve, wrong for next month's tuition payment.

4. 4
   Re-run twice a year and after any income change

   Rate cycles and bracket changes flip rankings. The math takes five minutes; set a reminder alongside your other financial check-ins.

When optimization isn't worth it

Honesty about scale: on $10,000 of cash, the best-case re-ranking gain is maybe $40-80/year — real, but below many people's threshold for new accounts and January spreadsheets. The math starts mattering around $25,000-30,000 in a mid-to-high bracket, and becomes borderline negligent to ignore past $100,000 in a high-tax state, where the gap between naive and optimized routinely exceeds $1,000/year. Below the threshold, take the best HYSA and spend your optimization energy on your savings rate instead — a 1% rate improvement on spending beats a 0.4% improvement on yield at almost any balance a normal household holds.

The bottom line

Advertised yield is pre-tax fiction; the only number that compounds in your favor is what survives your federal and state marginal rates. Learn your combined rate, multiply every candidate vehicle by what it actually keeps, and re-rank — low brackets usually keep the HYSA, high-tax-state high earners often land in Treasuries or single-state muni funds despite lower stickers. Redo the math twice a year, never trade up in risk for a tax edge, and skip the whole exercise below $25,000, where the best HYSA and your attention elsewhere is the optimal portfolio.