Here’s a Hypothetical:

Let’s say you’ve got a 100k rainy-day fund, and are choosing between two savings accounts:

Account A	4% APY
Account B	3% APY

Which account would you choose? Probably A, right?

But- If account B’s interest income was entirely tax-free- would that change your answer?

When investing, there’s an important principle to remember: How much you make isn’t nearly as important as how much you keep.

Bonds- So Hot Right Now

After years of low yields, fixed income investments like CD’s, Money Markets and Bonds are back. Interest rates haven’t been this high since 2001- the year Apple unveiled iTunes and the first Lord of the Rings film hit theaters. Investors have taken notice and poured over $650 Billion into money market funds so far in 2023.

Lately, 9 out of 10 client meetings include a discussion on what to do with their rainy-day fund.

What pays the most pre-tax income isn’t super helpful. Instead, we focus on the after-tax yield; which is how much clients will keep after they pay Uncle Sam. This is especially important for California residents (where the top state-income tax rate is 13.3%).

Fortunately, not all fixed income is created equal or taxed the same.

Below is a table which outlines taxability for common fixed income investments:

	Federal Income Tax	California Income Tax
CD’s	Taxable	Taxable
Corporate Bonds + Corp Money Markets	Taxable	Taxable
Treasury Bills + Treasury Money Markets	Taxable	Tax-Free
California Municipal Bonds + Ca Municipal Money Markets	Tax-Free	Tax-Free
National Municipal Bonds + Natl. Muni Money Markets	Tax-Free	Taxable

Each of these investments has its own yield that changes based on maturity date and market moves. If you’d like to see what some of Fidelity’s current rates are, click here.

Which one earns you the highest after-tax yield is highly dependent on your personal tax situation.

If you have questions about maximizing your rainy-day fund with a Cash Management account, give us a call or schedule one online. We’ll be happy to help.

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PS. If you’re a California Resident and want to know what your tax equivalent yield is, check out this handy table from Nuveen (click to view full PDF):