- InverseWealth
- Posts
- Smarter cash management for high-income earners
Smarter cash management for high-income earners
Get higher after-tax returns compared to a savings account
Sumeet Ganju
May 23, 2025 • Estimated Reading Time: 6 minutes
💵 Are you leaving cash on the table?
Are you a high-income earner keeping cash in a savings account? You might be feeling great about earning interest, while playing it safe.
But here's the catch: you could be giving up nearly half your interest to taxes — without even realizing it.
At face value, a 4% APY on a savings account seems attractive.
But let’s say that you are a high-income earner living in the state of California, and pay 35% federal and 9.3% California state income taxes.
Your after-tax return in this scenario is only 2.23%.
On a $100,000 investment, you receive:
Annual gross interest: $4000
After-tax interest: $2,230
That’s $1,770 lost annually — just to taxes.
🧠 Smarter options for parking your Cash
Below are three alternatives that deliver higher after-tax returns for your cash, while preserving liquidity.
These are tailored for high-income earners in California (35% federal tax bracket, 9.3% CA tax bracket). Investment yields used for the analysis were current as of May 22, 2025. For savings account, we assume 4% APY (some banks may offer higher APYs).
1. Treasury Bills
Treasury Bills are one of the safest investments in the world. They are backed by the full credit strength of the US Government.
Short-term treasuries typically return higher gross yields than most savings accounts. Since they are exempt from state income states, their after-tax returns are even higher.
Since buying and managing Treasury Bills might feel a bit cumbersome, investing via SGOV (iShares 0-3 Month Treasury ETF) in your brokerage account is a great alternative.
SGOV invests in Treasury Bonds (< 3 months remaining duration), and is currently offering a yield of 4.18%.
For a high earner in California, its after-tax yield is 2.72%, outperforming a savings account’s after-tax yield of 2.23%.
SGOV is a great alternative for parking cash given its terrific blend of yield, safety & liquidity.
It’s also a great choice for cash positions in retirement accounts, due to its high gross yield.
2. Municipal money market funds
Municipal money market funds typically invest in high-quality short-term municipal bonds. They are exempt from federal income taxes (and in some cases, state income taxes as well)
They carry a slightly higher risk than Treasuries, because the underlying bonds are backed by a state or municipality, instead of the federal government. They are still considered relatively safe investments though.
Our top pick is VMSXX (Vanguard Municipal Money Market Fund). This fund invests in high-quality, short-term municipal bonds, and has a current gross yield of 3.05%. It’s exempt from federal income taxes, but is subject to CA income taxes.
Its current after-tax return of 2.77% is higher than both SGOV and savings accounts.
It’s a great choice for investors that can take a small amount of additional risk in return for a very stable investment with a higher return.
3. Municipal Bond ETFs
Municipal Bond ETFs invest in municipal bonds as well, but within an ETF wrapper.
Our topic pick is VTEC (Vanguard California Intermediate-Term Muni ETF), which invests in a diversified portfolio of CA municipal bonds. It is exempt from both federal and CA income taxes (including the hated AMT).
With an after-tax yield of 3.69%, it outperforms all other options.
However, because it invests in intermediate-duration muni bonds, it has slightly more risk and can be more volatile than the other 2 options above.
VTEC is best suited for investors that can leave their cash parked for longer periods of time (5+ years) and can tolerate moderate volatility and risk.
⚖️ Comparison at a glance
Feature | High-Yield Savings (4.00% APY) | SGOV | VMSXX | VTEC |
|---|---|---|---|---|
Gross Yield1 | 4.00% | 4.18% | 3.05% | 3.69% |
Tax Treatment | Fully taxable (Fed + CA) | Fed taxable, CA exempt | Fed exempt, CA taxable | Tax-free (Fed + CA) |
After-Tax Yield | 2.23% | 2.72% | 2.77% | 3.69% |
After-Tax Return (on $100K) | $2,230 | $2,720 | $2,770 | $3,690 |
Liquidity | Instant | T+2 | T+1 | T+2 |
Risk Profile | FDIC-insured up to a limit. | Not insured. Very low risk. | Not insured. | Not insured. Moderate risk. |
Note: All performance figures shown are hypothetical and not from an actual trading account. Returns do not account for fees, trading costs or other expenses that would reduce real-world performance. After-tax yield assumes 35% Federal tax & 9.3% CA tax rates. All investing involves risk, including loss of principal. Past performance is not a guarantee or indication of future results.
💡 What should you do?
We suggest using a high-yield savings account for operational cash that you might need to access within the next 3 months.
The rest can be parked in SGOV or VMSXX depending on your preference. We only recommend VTEC in unique scenarios where customers are looking for long-term tax-free income.
Finally, at tax-time, remember to make sure your interest is categorized correctly on your tax return. Your CPA can help you with that.
Till next time,
Sumeet @ InverseWealth