Where you park your cash matters as much as the rate you earn. At a 44% combined marginal rate, the type of account you use for cash and fixed income makes a real dollar difference — not because the investments are dramatically different, but because how the interest gets taxed changes what you actually keep.
2026 key numbers for CA high earners
| ~44% | Combined marginal rate on interest income (federal ~30.7% + CA 13.3%) |
| 13.3% | CA income tax — Treasuries and CA munis are exempt from this |
| 3.8% | NIIT on investment income above $200K single / $250K MFJ |
| 0% | CA tax on California municipal bond interest |
| 0% | Federal tax on any municipal bond interest |
| Formula | Tax-equivalent yield = muni yield ÷ (1 − marginal rate) |
| Example | 3.0% CA muni = 5.36% taxable equivalent at 44% combined rate |
You probably hold some cash somewhere: an emergency reserve, money waiting to be deployed, a conservative slice of your portfolio. The question is just what form it should be in.
Here are the four main options — and how they actually compare after tax.
The Money Market Fund Landscape
Money market funds hold short-term debt and maintain a stable $1.00 share price. They are the standard cash vehicle at any brokerage. There are four types and they are taxed very differently.
1. Prime Money Market Funds
What they hold: Short-term corporate debt, CDs, and commercial paper from high-quality issuers.
Tax treatment: Fully taxable. Federal, state, and NIIT. No exemptions.
A prime fund yielding 4.50% sounds fine until you do the math. At 44%, you keep 2.52% — roughly the same as a high-yield savings account, which has the same problem.
Example funds: SPRXX, VMRXX
| Gross yield | 4.50% |
| Tax rate | 44% (federal + CA) |
| Gross on $100K | $4,500 |
| Tax owed | −$1,980 |
| After-tax | $2,520 |
When to use: Inside a 401(k) or IRA where taxes don't apply and you just want the highest gross yield. Not the right call in a taxable account.
2. Government / Treasury Money Market Funds
What they hold: U.S. Treasury bills and government-backed repurchase agreements. No corporate exposure.
Tax treatment: Taxable federally, but exempt from California state income tax. Same exemption as buying Treasuries directly.
A government fund at 4.40% is only taxed at the federal rate (~30.7%), not the full 44%. You keep about 3.05% after tax — and that beats the prime fund above despite the lower headline rate.
Example funds: VMFXX, SPAXX, SNVXX
| Gross yield | 4.40% |
| Tax rate | 30.7% (federal only) |
| Gross on $100K | $4,400 |
| Tax owed | −$1,351 |
| After-tax | $3,049 |
vs. Prime MMF at 4.50%: after-tax $2,520. The government fund puts $529 more in your pocket on $100K despite the lower headline rate.
When to use: Default cash position in a taxable brokerage account for a CA resident. Simple, liquid, and meaningfully better after tax than prime or HYSA.
3. National Municipal Money Market Funds
What they hold: Short-term debt from state and local governments across the country.
Tax treatment: Exempt from federal income tax and NIIT. Still taxable by California because most bonds are issued by other states.
For CA residents the federal exemption helps, but you still owe 13.3% to the state. At a gross yield of 2.90%, you end up keeping about 2.51% — barely better than a fully taxable prime fund and worse than a government MMF.
Example funds: VMSXX, FTEXX
| Gross yield | 2.90% |
| Tax rate | 13.3% (CA only) |
| Gross on $100K | $2,900 |
| Tax owed | −$386 |
| After-tax | $2,514 |
When to use: Rarely the right call for a CA resident. The federal exemption doesn't help enough when you're still paying 13.3% to the state and accepting a lower yield.
4. California Municipal Money Market Funds
What they hold: Short-term debt issued specifically by California state and local governments.
Tax treatment: Exempt from both federal and California income tax. Nothing goes to the IRS or the FTB.
A CA muni fund at 3.00% stays at 3.00% after taxes. The tax-equivalent yield at 44% is 5.36%, meaning you'd need a taxable account yielding 5.36% just to match it. When government MMF rates sit around 4.40%, the CA muni wins — but this flips depending on the rate environment.
Example funds: VCTXX, FSPXX
| Gross yield | 3.00% |
| Tax rate | 0% |
| Gross on $100K | $3,000 |
| Tax owed | $0 |
| After-tax | $3,000 |
A CA muni yielding 3.10%+ beats the government MMF. Below 2.80% it loses. Run the formula.
When to use: When CA muni yields are competitive enough to win on a tax-equivalent basis. Check current yields periodically — this flips with the rate environment.
Side-by-Side Comparison
Approximate 2026 yields. $100,000 invested for one year. 44% combined rate (federal ~30.7% + CA 13.3%).
| Instrument | Gross | Taxed at | After-tax | On $100K |
|---|---|---|---|---|
| Prime MMF (SPRXX) | 4.50% | 44% | 2.52% | $2,520 |
| HYSA | 4.50% | 44% | 2.52% | $2,520 |
| Govt MMF (VMFXX) | 4.40% | 30.7% | 3.05% | $3,050 |
| National Muni MMF (VMSXX) | 2.90% | 13.3% | 2.51% | $2,510 |
| CA Muni MMF (VCTXX) | 3.00% | 0% | 3.00% | $3,000 |
If your investment income is above $200K single or $250K MFJ, add 3.8% NIIT on top of the taxable portions. That makes the exempt options look even better.
Beyond Money Markets: Direct Fixed Income
Treasury securities (T-bills, T-notes, T-bonds): Same tax treatment as a government MMF — federal taxable, CA exempt — but with fixed maturities instead of a floating rate. A 6-month T-bill locks in your yield. Useful when you want certainty and don't need daily liquidity. Buy at TreasuryDirect.gov or through your brokerage.
Municipal bonds: Longer duration. Federal exempt, and CA bonds are also CA exempt. Use the tax-equivalent yield formula to compare: divide the muni yield by (1 minus your combined rate). At 44%, a 3.5% CA muni bond equals a 6.25% taxable equivalent. If the best taxable option yields less than that, the muni wins.
Watch credit quality — the tax benefit doesn't matter if the issuer defaults. Stick to investment-grade or use a diversified fund. Also confirm AMT status since some private activity bonds trigger it, though most fund shares do not.
What to Use Where
| Account type | Best option | Why |
|---|---|---|
| Taxable brokerage | CA Muni MMF or Govt MMF | Maximize after-tax yield |
| 401(k) / IRA | Prime MMF | Tax doesn't apply — just take the highest gross yield |
| Business operating account | Govt MMF or T-bills | CA exemption, stays liquid |
| Long-duration taxable fixed income | CA Muni bonds | Double exemption compounds over time |
Watch-Outs
- TIPS in taxable accounts: The inflation adjustment to principal gets taxed as ordinary income each year even though you don't receive the cash until maturity. Hold TIPS inside a retirement account.
- VMFXX composition: Vanguard's government fund occasionally holds a small percentage of non-Treasury securities. Some states require 50%+ in direct U.S. obligations for the full state exemption. California generally follows federal treatment, but worth confirming with your preparer each year.
- Yields change. The winner between CA muni MMF and government MMF shifts as rates move. Run the tax-equivalent calculation any time rates shift meaningfully or at least once a quarter.
- The formula: Muni yield ÷ (1 − combined marginal rate) = taxable equivalent yield. If that number beats what taxable options are paying, the muni wins.
Bottom Line
Prime money market funds and HYSAs are the obvious defaults — and usually the wrong answer for a high earner in California. Government funds save you CA state tax. CA muni funds save you both. The math is straightforward; most people just never run it.
At $500K in cash, the difference between a prime MMF and a government MMF is roughly $2,600 per year. The difference between prime and a well-priced CA muni MMF is similar. That's not life-changing — but it's also a five-minute decision you make once and benefit from every year.
Until next time,
Ben Stauffer, CFP®
PS — Interested in a free financial breakdown? I'll map out your complete financial picture and give you a clear list of exactly what to do next. Here's the link to get started.
This article is provided for general educational and informational purposes only and does not constitute tax, legal, or investment advice. Fund yields, tax rates, and rate environments change frequently — verify current yields before making any decisions. Every individual's tax situation is different. Consult with your own qualified tax advisor, CPA, or financial planner before making any investment or tax decisions. Lindy Wealth is a registered investment adviser. Registration does not imply a certain level of skill or training.
Frequently Asked Questions
What is the best money market fund for high earners in California?
For most California high earners in a taxable account, a government/Treasury money market fund (like VMFXX or SPAXX) or a California municipal money market fund (like VCTXX) will outperform a prime money market fund after tax. The government fund is exempt from California's 13.3% state tax. The CA muni fund is exempt from both federal and state tax. Which wins depends on current yields — use the tax-equivalent yield formula to compare.
Is a high-yield savings account better than a money market fund?
For California high earners in a taxable account, typically no. Both HYSAs and prime money market funds pay interest that is fully taxable at the federal and state level. A government money market fund earning a similar gross rate will put more money in your pocket because the interest is exempt from California's 13.3% income tax.
What is tax-equivalent yield and how do I calculate it?
Tax-equivalent yield converts a tax-exempt return into its taxable equivalent so you can compare apples to apples. The formula: muni yield ÷ (1 − combined marginal rate). Example: a 3.0% California muni yield ÷ (1 − 0.44) = 5.36% taxable equivalent. If the best taxable option yields less than 5.36%, the muni wins.
Are government money market funds exempt from California state tax?
Yes. Interest from U.S. Treasury obligations — including Treasury bills, notes, and bonds — is exempt from California state income tax under federal law. Government money market funds that invest primarily in Treasuries pass this exemption through to investors. Vanguard's VMFXX, Fidelity's SPAXX, and Schwab's SNVXX are common examples.
What is NIIT and does it apply to money market fund income?
The Net Investment Income Tax (NIIT) is a 3.8% surtax on investment income for taxpayers above $200,000 (single) or $250,000 (married filing jointly) in modified adjusted gross income. It applies to interest from prime money market funds and HYSAs. Municipal bond interest — including CA muni money market funds — is exempt from NIIT, which makes the exempt options even more attractive at higher income levels.
Should I hold money market funds inside my IRA or 401(k)?
Inside a traditional IRA or 401(k), taxes don't apply to investment income, so the tax treatment of different money market fund types is irrelevant. In retirement accounts, just take the highest gross yield available — typically a prime money market fund. Save the government and muni funds for your taxable accounts where the tax exemptions actually matter.