Cash Is Not Just Cash

How taxes, liquidity, geography, and psychology can quietly change where your “safe money” belongs

Note this post is in progress, and will be updated

Intro

Given the large uncertainty we are facing in the world economy, many people are considering keeping larger cash reserves to preserve their savings or opportunistically buy when there is an inevitable market downturn.

One notable example of financial experts thinking the same way is the Berkshire (BRK) holding company, where Warren Buffett, Greg Abel, and team have accumulated a large amount of cash to opportunistically identify attractive investments, but have not pulled the trigger lately on deployment. This sends a strong signal to proceed with caution. Many experts with access to far more opportunities than normal investors, including private markets and enormous capital deployment capacity, have struggled to find enough compelling deals.

At the same time, many investors correctly point out that hoarding cash and trying to time the market historically underperforms simply staying invested. Time in the market usually beats timing the market.

Still, investing is not only about long-term expected returns.

Not many people can stomach having all of their money in a tenuous situation, especially when there are bills to pay and mouths to feed.

I have had many conversations with friends and family about where to park money safely. The answer turns out to be more complicated than expected because there are major differences in yield, liquidity, taxes, accessibility, and risk.

Many people know about high yield savings accounts, or HYSAs, but there are several other options that can provide high liquidity and potentially better after-tax returns. Some may even provide meaningful tax advantages depending on where you live. For optimizers, like myself, this is worth diving deep into.

This article is an attempt to organize the tradeoffs and provide a framework for deciding where “safe money” belongs.

Note: For those who are interested in optimization to get healthcare subsidization through the ACA, please see the appendix for an extended discussion.

First: Why Hold Cash at All?

Cash often gets treated as dead money.

That may be true during long bull markets. But cash serves multiple purposes that become more important during uncertain periods:

  • Emergency reserve
  • Protection against job loss
  • Opportunity capital during market downturns
  • Protection from sequence-of-return risk
  • Psychological stability
  • Short-term spending needs
  • Tax and income planning

Cash is not only about maximizing return.

Sometimes it is about maximizing flexibility.

The Purpose of Cash Changes With Wealth

The role of cash changes as financial situations evolve.

At lower wealth levels:

Cash protects you from emergencies.

At higher wealth levels:

Cash protects you from making bad decisions.

Liquid Assets1 Suggested Safe Bucket Approx Cash % Primary Purpose
$10K $7.5–10K 75–100% Build stability
$50K $10–20K 20–40% Emergency reserve
$100K $15–30K 15–30% Financial resilience
$250K $30–60K 12–24% Flexibility
$500K $50–100K 10–20% Downside protection
$1M $100–200K 10–20% Defensive growth
$3M $250–400K 7–13% Sequence-risk buffer
$5M $300–500K 5–10% Lifestyle flexibility
$10M+ $400–700K 3–7% Tax management and optionality

One interesting pattern appears:

Cash percentages generally decline as wealth rises.

The amount of liquidity needed does not scale linearly with portfolio size.

*Note: these are just preliminary suggestions, and not definitive financial advice

The Main Cash Players

Vehicle Yield Potential Liquidity Tax Treatment Typical Role
HYSA Moderate Immediate Fully taxable Emergency reserve
SGOV Moderate to High T+12 Treasury income, historically ~95% state tax exempt Cash substitute
FDLXX Moderate Immediate Treasury-heavy, historically ~90–95% CA state tax exempt Brokerage cash
SPAXX Moderate Immediate Mixed government securities, generally receives less CA tax benefit (currently none)3 Settlement fund
SNSXX Moderate Same-day / brokerage dependent Treasury-heavy, historically ~90–100% state tax exempt Schwab Treasury MMF
VUSXX Moderate Immediate Treasury-heavy, historically ~80–99% CA state tax exempt Treasury MMF
VTEC Moderate Intraday Federal and CA state tax exemptions Bond allocation
Treasury Bills Moderate to High Maturity dependent State tax exempt Cash ladder

The yield potential differences are pretty small and reflect only recent conditions (subject to change)

Important distinction:

HYSA, SGOV, SPAXX, FDLXX, VUSXX, SNSXX, and T-bills behave mostly like cash.

VTEC does not.

VTEC is fundamentally a municipal bond fund and carries interest-rate risk.

One practical note on liquidity:

At Fidelity, eligible money market funds such as FDLXX can often be automatically liquidated to cover transactions. If you have a $4,000 credit card bill or purchase a stock, Fidelity may automatically sell FDLXX to cover the balance with no manual sell required.

For optimizers, this can eliminate some of the T+1 settlement friction that SGOV carries.

Another practical consideration appears at tax time.

For funds such as SGOV, FDLXX, VUSXX, and SNSXX, you will need to determine the portion of income derived from U.S. Treasuries to calculate your state tax exemption. The percentages vary year to year and are generally published by fund providers.

Helpful reference:

State Tax Exempt Treasury Fund and ETF Guide

Yield Can Be Misleading

Most people naturally compare:

“Which yield is highest?”

That can lead to mistakes.

Suppose:

HYSA yield:

4.5%

Federal tax:

32%

California:

9.3%

After taxes:

4.5 × (1 - .413)

≈ 2.6%

A Treasury-heavy fund with a lower stated yield may produce similar or even higher after-tax income.

This becomes especially important in high-tax states.

State differences matter

State Type Examples Implication
High-tax California, New York, New Jersey, Oregon Treasury funds become more attractive
Moderate-tax Illinois, Virginia, North Carolina Smaller Treasury advantage
No income tax Texas, Florida, Nevada, Washington HYSA becomes more competitive

California deserves special attention because some of the rankings can change dramatically.

High Tax States Change the Equation

Municipal bond funds often avoid:

  • Federal taxes
  • State taxes
  • Sometimes local taxes

The proper comparison is tax-equivalent yield:

Tax Equivalent Yield = Tax Free Yield ÷ (1 − Marginal Tax Rate)

Example:

Municipal yield:

3.5%

Combined tax:

42%

Equivalent taxable yield:

≈6%

This explains why investors in California and New York often prefer municipal funds.

But there is a catch.

VTEC Is Not Cash

Many investors unconsciously assume:

Bond fund = cash

That can become painful.

Unlike Treasury funds:

VTEC carries:

  • Interest-rate risk
  • Municipal credit risk
  • Price fluctuations

In a rising-rate environment, a municipal bond fund can lose 5–10% in price, which a money market fund won’t.

Therefore:

Good use:

Tax-efficient bond allocation

Less ideal use:

Emergency reserve

Tradeoffs

Vehicle Advantages Disadvantages
HYSA Simple, FDIC insured, immediate access Fully taxable
SGOV Tax efficient, liquid Small NAV movement
FDLXX Treasury exposure with cash behavior Slightly lower yields at times
SPAXX Very convenient Less tax efficient, especially CA
SNSXX Treasury-heavy with favorable state tax treatment Requires manual buying/selling; less seamless cash behavior
VUSXX Stable with Treasury advantages Brokerage ecosystem dependent
VTEC Excellent after-tax income for high earners Bond volatility
T-Bills Often highest after-tax yield Requires active management

I’ve bolded aspects that are pretty unattractive to me.

Example Case: $20K Cash, $100K Salary, California Resident

Assume:

  • $20,000 available
  • $100,000 salary
  • California resident
  • Moderate tax bracket
  • Building wealth
  • Wants emergency reserves plus dry powder

Priorities:

  1. Stability
  2. Liquidity
  3. Yield
  4. Simplicity
  5. Optionality

Suggested allocation:

Holding Amount % Purpose
HYSA $8,000 40% Immediate emergencies
SGOV $6,000 30% Dry powder
VUSXX or FDLXX $4,000 20% Stable Treasury reserve
SPAXX $2,000 10% Settlement reserve

Could this be simplified to HYSA only?

Absolutely.

Optimization matters more as balances increase.

Ranking: Taxable Brokerage Accounts

For California residents:

Rank Fund Why
1 SGOV Best balance of Treasury exposure, yield, and CA state tax advantages
2 FDLXX Treasury-heavy with favorable tax treatment and seamless Fidelity cash behavior
3 VUSXX Stable Treasury exposure with strong state tax benefits
4 SNSXX Schwab Treasury option with favorable tax treatment, but slightly more cash friction
5 SPAXX Excellent convenience but weaker CA tax treatment
6 HYSA Simple but fully taxable
7 VTEC Better classified as bonds than cash

For no-income-tax states:

HYSA and money markets become much more competitive.

For high-tax states:

Treasury-heavy options become increasingly attractive.

For high-income and high-net-worth individuals with large cash balances, these seemingly small differences can become amplified. Not only are they often in higher marginal tax brackets, but the absolute amount of cash being held may also be much larger.

A few tenths of a percent may not sound meaningful on $20,000. It can become much more noticeable on several hundred thousand or even millions of dollars in cash reserves.

Additional income can also have second-order effects beyond taxes. Depending on your situation, it may influence healthcare subsidies, tax phaseouts, Medicare IRMAA thresholds, investment income taxes, and other planning considerations.

Small percentages can quietly become meaningful dollars.

Ranking: IRA Accounts

Inside IRAs:

  • State taxes disappear
  • Federal taxes disappear
  • Convenience matters more
Rank Fund Why
1 SPAXX Extremely convenient as a brokerage settlement/core position
2 FDLXX Treasury exposure with seamless Fidelity cash behavior
3 VUSXX Similar Treasury profile with stable cash characteristics
4 SGOV Still attractive, but tax advantages mostly disappear and T+1 remains
5 SNSXX Treasury option for Schwab users, but more manual cash management
6 HYSA Less integrated into brokerage workflow
7 VTEC Tax advantage mostly disappears and bond risk remains

One surprising lesson while researching this topic:

The rankings can completely flip depending on account type.

Online Discussions and Resources Worth Reading

One thing I found while researching this topic is that communities on Reddit and Bogleheads repeatedly converge on similar themes. People initially focus on headline yield, but eventually the discussions drift toward taxes, convenience, and behavioral factors.

That is probably a good thing.

SPAXX vs SGOV

Many investors eventually realize this question is less about return and more about whether cash should behave like a brokerage sweep account or like deployable Treasury dry powder.

Recurring themes:

  • SPAXX prioritizes convenience
  • SGOV prioritizes Treasury exposure
  • High-tax states make SGOV more compelling

Discussion:

Fidelity Discussion: SPAXX or SGOV?

Additional:

Bogleheads Discussion: What brokerage account should I use for SGOV?

At first I thought this was strange.

How could a Treasury ETF become universally recommended?

The answer appears to be that it quietly checks many boxes:

  • liquidity
  • Treasury exposure
  • simplicity
  • tax benefits
  • attractive yields

Discussion:

Bogleheads Discussion: Why is SGOV recommended at all?

FDLXX vs SPAXX

Initially these funds appear nearly identical.

Then you learn:

  • SPAXX contains more repo and government securities
  • FDLXX is Treasury-heavy
  • State tax treatment can differ substantially

Discussion:

Fidelity Discussion: Difference Between FDLXX and SPAXX

Reference:

Fidelity Money Market Fund Tax Information PDF

Additional Resources

Video:

Fidelity SPAXX, Schwab SWVXX & Vanguard VMFXX: Losing Money On Your Money Market Fund To Taxes?

This video does a nice job discussing a subtle issue many investors overlook: after-tax yield can matter more than headline yield, especially for investors in higher-tax states.

Helpful tax guide:

State Tax Exempt Treasury Fund and ETF Guide

This guide walks through how Treasury-heavy funds and ETFs may qualify for partial state tax exemptions and how to determine those percentages during tax filing.

Final Thoughts

I originally thought this topic would be simple.

Where do you put your cash?

Instead I found a web of tradeoffs involving taxes, behavior, yield, flexibility, and even geography.

The surprising lesson was that cash allocation is not just about maximizing returns, but also about providing options for decision-making and planning.

Some of this may admittedly drift into overthinking and over-optimization, but I do think there are situations where these decisions can have a substantial impact. Small differences in yield or tax treatment may not matter much on a few thousand dollars, but they can become amplified with larger balances, higher tax brackets, or specific planning goals.

Perhaps time would be better spent generating ideas for increasing income rather than optimizing where cash sits. Then again, part of investing and personal finance is understanding the landscape and exploring the tradeoffs.

At the very least, it’s fun to think and talk about!

Income-Reduction Strategies Matter More Than Cash Optimization

At this point I started realizing something interesting.

I originally approached this as:

“Which cash vehicle gives the highest effective return?”

But for families paying attention to ACA subsidies, that may not even be the primary question.

Cash vehicle choice affects MAGI a little.

Income-reduction strategies can affect it a lot.

Assume:

  • California family of four
  • Combined income: $125,000
  • $30,000 cash reserve
  • Monitoring a planning threshold around ~$129K*
  • Taxable brokerage account

*Monitoring a planning threshold around ~$129K — the approximate 400% FPL cutoff for a family of four in 2026, above which premium subsidies generally disappear entirely.

A $30,000 SGOV allocation generating roughly ~$1,065 annually increases MAGI:

$125,000 + $1,065 ≈ $126,065

Still below the hypothetical threshold.

On its own, this does not appear significant.

But families often have additional income sources:

  • dividends
  • bank interest
  • capital gains
  • bonuses
  • side income
  • spouse income variability

Small additions can quietly compound.

Now compare that with tools that directly reduce MAGI:

Strategy Approx MAGI Reduction Notes
Traditional 401(k) contributions Dollar-for-dollar One of the strongest levers for W-2 employees
Family HSA contribution ~$8,300 Triple tax benefit
Traditional IRA contributions (if deductible) Up to ~$14,000 married Income limits may apply
SEP IRA / Solo 401(k) Potentially very large Strong lever for self-employed
Capital loss harvesting Variable Can offset gains
Business deductions Variable Lowers self-employment income

Now suppose this family contributes:

  • HSA: ~$8,300
  • Traditional IRAs: ~$14,000 combined

Potential MAGI reduction:

$20,000+

That reduction could easily have a larger impact on healthcare subsidies than optimizing whether SGOV yields slightly more than a HYSA.

The takeaway:

For ACA-sensitive families, MAGI reduction is usually the primary lever. Cash optimization is secondary.

Both matter.

But confusing the order of importance can lead to over-optimizing the wrong thing.

Important note: ACA thresholds, Federal Poverty Level calculations, contribution limits, and subsidy rules change over time. The values here are intended to be illustrative rather than definitive planning guidance.

Where This Changes the Cash Vehicle Rankings

For households paying close attention to MAGI and healthcare subsidy planning, the rankings shift slightly:

Rank Vehicle Why
1 SGOV Best balance of after-tax yield, state tax treatment, and flexibility
2 FDLXX Similar Treasury advantages with simpler cash behavior
3 VTEC Strong tax efficiency, but less ACA benefit than many initially assume
4 SPAXX Convenience winner but weaker tax profile
5 HYSA Simplest option but least tax efficient

VTEC drops slightly not because it is a poor vehicle, but because its biggest advantage, tax-exempt income, does not translate into ACA subsidy savings the way many people initially expect.

Treasury exemptions help state taxes.

They generally do not help federal MAGI calculations.

  1. These ranges are not derived from a formal optimization model. They represent a heuristic framework combining emergency-fund guidelines, retirement “bucket strategy” concepts (often 1–5 years of spending), sequence-of-return considerations, and behavioral factors. As wealth rises, the purpose of cash often shifts from emergency protection toward flexibility, opportunity, and planning. ↩

  2. T+1 means “trade date plus one business day.” If you sell SGOV today, the cash officially settles and becomes fully available on the following business day. Money market funds like FDLXX may feel more liquid because brokerages can often automatically liquidate them to cover purchases or payments before settlement becomes noticeable. ↩

  3. California generally requires a fund to hold at least 50% U.S. government obligations for any Treasury income to qualify for state tax exemption. SPAXX currently falls below this threshold, resulting in no CA state tax benefit. SGOV, FDLXX, and VUSXX are safer options. ↩