Cash + Bond Selection

A “great” cash yield can be a mediocre yield after taxes. The right cash and bond choices can put hundreds or thousands more in your pocket each year, without changing your risk.

Key numbers

At a 44% combined rate, the type of account you use for cash and fixed income makes a real difference. Not because the investments are dramatically different, but because how the interest gets taxed changes the actual money you keep.

The Money Market Fund Landscape

Money market funds hold short-term debt and keep 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.

The problem: A prime fund yielding 4.50% sounds fine until you do the math. At 44%, you keep 2.52%.

Example funds: Fidelity Money Market Fund (SPRXX), Vanguard Prime Money Market (VMRXX)

Example ($100,000, one year):
Gross interest: $4,500  ·  Tax at 44%: $1,980  ·  After-tax: $2,520

When to use: Inside your 401(k) or IRA where taxes do not apply and you just want the highest gross yield. Not in a taxable account at your rate.

2. Government / Treasury Money Market Funds

What they hold: U.S. Treasury bills and government-backed repurchase agreements.

Tax treatment: Taxable federally but exempt from California state income tax.

Why it matters: A government fund at 4.40% is only taxed at the federal rate of about 30.7%, not the full 44%. You keep around 3.05% after tax — more than a prime fund despite a lower headline rate.

Example funds: Vanguard Federal Money Market (VMFXX), Fidelity Government Money Market (SPAXX), Schwab Government Money Fund (SNVXX)

Example ($100,000, one year):
Gross interest: $4,400  ·  Tax at 30.7% federal only: $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.

When to use: Default cash position in a taxable brokerage account for a CA resident.

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 of the bonds are issued by other states.

The reality for CA residents: You save on federal tax but you still owe California 13.3%. At a gross yield of 2.90%, you end up keeping about 2.51% after CA tax — barely better than a fully taxable prime fund and worse than a government MMF.

Example funds: Vanguard Municipal Money Market (VMSXX), Fidelity Municipal Money Market (FTEXX)

When to use: Rarely the right call for a CA resident.

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.

Why this is interesting: A CA muni fund at 3.00% stays at 3.00% after taxes. The tax-equivalent yield at 44% is 5.36%, meaning you would need a taxable account to yield 5.36% just to match it.

Example funds: Vanguard CA Tax-Exempt Money Market (VCTXX), Fidelity CA Municipal Money Market (FSPXX)

Example ($100,000, one year):
Gross interest: $3,000  ·  Tax: $0  ·  After-tax: $3,000
vs. Government MMF at 4.40%: after-tax $3,049. Nearly identical — a CA muni yielding 3.10%+ wins.

When to use: When CA muni yields are competitive enough to win on a tax-equivalent basis.

Side-by-Side Comparison

Approximate 2026 yields. $100,000 invested for one year. 44% combined rate.

Beyond Money Markets: Direct Fixed Income

Treasury securities (T-bills, T-notes, T-bonds): Same tax treatment as a government MMF — federal taxable and 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. Watch credit quality — stick to investment-grade or use a diversified fund.

What to Use Where

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. 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 divided by (1 minus your combined marginal rate) gives you the taxable equivalent yield. If that number beats what taxable options are paying, the muni wins.