Money market funds vs. T-bills vs. CDs: yield, safety and taxes

Basics7 min read · updated 2 November 2026 · 5 sources

Cash that waits for a purchase, a tax bill or the next investment can sit in four places: a high-yield savings account, money market funds, Treasury bills or certificates of deposit. All four earn roughly the short-term interest rate, but they differ in protection, in how fast you get the money and above all in taxes. In a high-tax state, the difference after tax can be larger than the difference in the quoted yields.

The four places for cash

Bank deposits, including savings accounts, money market deposit accounts and CDs, are insured to at least $250,000 per depositor, per bank and per ownership category. Mutual funds, including money market funds, and Treasury securities are not FDIC insured (FDIC 2026); Treasury bills are direct obligations of the US government instead. For an emergency reserve, the same options apply; how much to hold is covered in emergency fund.

Why the yields differ

All four options track the federal funds rate set by the Federal Reserve, but not equally fast. Drechsler et al. (2017) show that when the Fed raises rates, banks widen the gap between market rates and the rates they pay on deposits, and deposits flow out of the banking system, more so where banks face little competition. Money market funds and Treasury bills pass higher rates on almost immediately, savings accounts often with a lag, and traditional branch accounts sometimes hardly at all. Online banks compete harder for deposits and usually pay rates closer to the market.

CDs lock in a rate for a fixed term. That is an advantage when rates fall and a disadvantage when they rise. A longer CD also carries a small bet on the yield curve: when the curve is inverted, short terms pay more than long ones.

Taxes: the state income tax makes the difference

Interest on savings accounts and CDs is taxed as ordinary income by the federal government and by the state. Interest on Treasury bills, notes and bonds is subject to federal income tax but exempt from all state and local income taxes (IRS Publication 550 2025). Distributions from money market funds are reported as dividends, not interest (IRS Publication 550 2025); whether a state exempts the part that comes from Treasury interest depends on the state and on how much of the fund is invested in Treasuries.

The comparison is easiest with the tax-equivalent yield: the yield a fully taxed investment would need to match the Treasury bill. With the numbers above, the CD would need 3.9% × (1 − 0.24) / (1 − 0.24 − 0.06), about 4.23%, to break even.

How safe are money market funds?

A money market fund aims to keep a stable value of $1 per share and holds very short-term debt. Government money market funds invest almost entirely in Treasury bills and repurchase agreements backed by Treasuries; prime funds also buy short-term corporate debt. Since the SEC reform of 2023, funds can no longer suspend redemptions, and they must hold at least 25% of their assets in daily and 50% in weekly liquid assets (SEC, money market fund rule 2023).

The rules are a response to past runs. In September 2008, after Lehman Brothers failed, investors pulled money out of prime funds within days, and the pattern of withdrawals looked like a run in which investors reacted to what other investors did (Schmidt et al. 2016). Government funds were the safe haven at the time. For cash that must be there, government funds or Treasury bills are the more conservative choice.

Buying Treasury bills and building a ladder

Treasury bills are sold at a discount to their face value, in multiples of $100, with terms of a few weeks up to one year; the difference between the price and the face value is the interest (IRS Publication 550 2025). You can buy them at auction directly from the Treasury or through a brokerage account, where they can also be sold before maturity at the market price.

A ladder spreads money over several maturities so that a part comes due regularly. With four bills of $10,000 that mature four weeks apart, $10,000 becomes available every four weeks; each maturing bill is either spent or rolled into a new one at the then current rate. Money market funds do the same work automatically, at the cost of a small expense ratio and without the full state tax exemption.

Cash and inflation

Cash protects the nominal value, not the purchasing power. Over long periods, short-term interest rates have roughly kept pace with inflation, sometimes a little ahead and sometimes clearly behind, which leaves little or nothing in real return after taxes. Cash is therefore the right place for money with a short horizon and the wrong place for long-term savings, which need stocks and bonds to grow.

Common mistakes

• Leaving cash in a checking or branch savings account: banks with little competition pay far below market rates for years.
• Comparing yields before tax: in high-tax states, Treasury bills can win with a lower quoted yield.
• Assuming a money market fund is FDIC insured: it is not; a money market deposit account at a bank is.
• Chasing the last few basis points in prime funds: for emergency money, safety and access matter more than a slightly higher yield.
• Locking long-term money in cash: what will not be needed for years belongs in a diversified portfolio.

This article explains general principles and is not financial or tax advice. Yields change with the Federal Reserve's policy rate, and state tax treatment of fund distributions differs; check the current rates and your state's rules.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.