Meet two hypothetical savers, each with $30,000 in cash.
Dana keeps hers in a high-yield savings account at an online bank. Her rate changes whenever the bank decides it should. The money moves to her checking account in a day or two, and every dollar is FDIC-insured.
Marcus parks his in a Treasury money market fund at his brokerage. His yield moves almost daily, tracking short-term interest rates. He lives in a state with a 6% income tax, and most of his fund’s income is exempt from it. When he wants to buy an index fund, the cash is already sitting in the same account.
Neither of them is wrong. Which one earns more depends on the yields on offer, your state taxes and what the cash is for. Here is how to figure out your own answer.
Side by side
| Feature | High-yield savings account | Money market fund |
|---|---|---|
| What it is | A bank deposit | A mutual fund holding short-term debt |
| Protection | FDIC insurance up to $250,000 per depositor, per bank, per ownership category | Not FDIC-insured; SIPC covers brokerage failure, not investment losses |
| How the rate is set | By the bank, at its discretion | By the yields on the fund’s holdings, minus expenses |
| Typical share price | Not applicable | Aims for a stable $1.00 (retail and government funds) |
| State income tax | Fully taxable | Treasury fund income often state-exempt; muni funds often federal-exempt |
| Access | Transfers to checking, usually 1 to 3 business days | Sell in a brokerage account, usually settled same or next business day |
| Best for | Emergency funds, short-term goals, simplicity | Cash inside a brokerage account, larger balances, high-tax states |
How money market funds work
A money market fund is a mutual fund that buys very short-term, high-quality debt: Treasury bills, repurchase agreements backed by Treasuries, commercial paper or short-term municipal notes. SEC rules limit the maturity, credit quality and concentration of what the fund can hold, and require it to keep a large share of assets in cash or securities that mature within a day or a week.
The SEC’s investor education site has a clear money market fund explainer. The main categories:
- Government funds hold at least 99.5% of assets in cash, government securities and repos backed by them. Treasury-only funds are a subset that hold mostly Treasury bills and notes.
- Prime funds also buy corporate commercial paper and bank debt, often yielding a little more.
- Tax-exempt (municipal) funds hold short-term muni debt whose interest is generally free of federal tax. See our municipal bonds guide for how that tax break works.
Can a money market fund lose money?
Rarely, but yes. A fund “breaking the buck,” with its share value falling below $1.00, has happened, most notably in 2008. Since then, the SEC has tightened the rules several times. Reforms adopted in 2023 raised liquidity requirements and require institutional prime and institutional tax-exempt funds to charge liquidity fees during heavy redemptions. Government funds, which most brokerages use as their default cash sweep or settlement option, carry the least risk of the three types.
How savings accounts compare
A savings account is a deposit, so its safety comes from FDIC insurance rather than from the quality of investments. Up to $250,000 per depositor, per insured bank, per ownership category is covered even if the bank fails. Couples can increase coverage with joint accounts, and you can spread money across banks for more. The FDIC’s deposit insurance page explains the categories.
The weak point is pricing. Banks set savings rates as they like. Online banks often compete hard for deposits, then lag on raises or cut quickly when rates fall. Big brick-and-mortar banks frequently pay a small fraction of what online banks or money market funds pay. A money market fund’s yield, by contrast, follows short-term market rates more directly.
Don’t confuse a money market fund with a money market account. A money market account is a bank deposit, FDIC-insured, often with check-writing. It behaves like a savings account, not a fund.
Running the after-tax math
Back to our savers. Suppose, hypothetically, Dana’s savings account pays 4.0% and Marcus’s Treasury money market fund pays 3.9%, and both are in the 22% federal bracket and live in a state with a 6% income tax.
- Dana’s savings: 4.0% taxed federally and by her state. She keeps about 4.0% × (1 − 0.22 − 0.06) = 2.88%.
- Marcus’s Treasury fund: assuming nearly all the income qualifies for the state exemption, he keeps about 3.9% × (1 − 0.22) = 3.04%.
Lower headline yield, higher take-home. (This simplifies the interaction between federal and state taxes, but the direction holds.) In a state with no income tax, the exemption is worth nothing and Dana’s higher rate wins.
State rules vary. Some states only exempt fund income if Treasuries make up a minimum share of the fund’s holdings. Your fund company publishes the percentage of income from US government obligations each year, usually in January, and your tax software will ask for it.
Things to check before you choose
- Expense ratio. It comes directly out of a money market fund’s yield. Large providers’ government funds are often inexpensive; some sweep funds are not.
- Your brokerage’s default cash. Many brokerages sweep uninvested cash into a bank program paying very little. You may need to buy a money market fund yourself to earn the market rate.
- Minimums. Some funds require $1,000 or more to start; savings accounts often have none.
- Yield quote. Compare a fund’s 7-day SEC yield with a bank’s APY. They are close but not identical measures.
Choosing your cash home
Use a high-yield savings account for your emergency fund and near-term spending money if you want FDIC insurance, simple transfers to checking and no investment decisions at all. It is the easier choice for most households.
Use a money market fund for cash that lives inside a brokerage account: money waiting to be invested, proceeds from a sale, a house down payment you plan to wire from the brokerage, or a large balance above FDIC limits. It also tends to win if you live in a high-tax state and pick a Treasury fund, or if you are a high earner who can use a tax-exempt fund.
Plenty of people use both. And for money you won’t need for years, neither is ideal; consider TIPS or a diversified portfolio instead.
Frequently asked questions
Is a money market fund safer than a savings account?
Not in the legal sense. A savings account carries a government guarantee up to the FDIC limit; a money market fund does not. In practice, government money market funds hold very low-risk assets, but the protection is different.
Are money market fund dividends taxed like interest?
They are reported as dividends, but they are generally taxed at ordinary income rates, not the lower qualified dividend rates.
How fast can I get money out of a money market fund?
Selling usually settles the same or next business day inside the brokerage account. Moving it to your bank then takes one to three business days.
Does SIPC protect my money market fund?
SIPC protects up to $500,000 of securities and cash, including a $250,000 limit for cash, if your brokerage fails and assets are missing. It does not cover a drop in the fund’s value.
