Where to keep your cash: savings accounts, CDs, money market funds and T-bills

Cash you will need in the next few years should not swing with the stock market, but it should not sit idle at zero percent either. In the US, four places do this job well: high-yield savings accounts, certificates of deposit (CDs), money market funds and Treasury bills. They differ in who protects your money, how fast you can reach it and how the interest is taxed.

Start with safety: what is insured and what is not

Deposits at an FDIC-insured bank are covered up to $250,000 per depositor, per bank, for each ownership category (single, joint, certain retirement accounts and so on). That includes savings accounts, checking accounts, money market deposit accounts and CDs. Credit unions have the same $250,000 coverage through the NCUA's Share Insurance Fund, applied per member, per credit union, per ownership category.

The FDIC lists what it does not cover: stocks, bonds, mutual funds, annuities, crypto assets and US Treasury bills, bonds and notes, even when you buy them through an insured bank. The NCUA's list of exclusions is similar.

That matters for two products with confusingly similar names:

• A money market deposit account is a bank or credit union deposit. It is insured like a savings account.
• A money market fund is a mutual fund that buys short-term debt such as T-bills and commercial paper. FINRA points out that it has no FDIC or NCUA insurance. Funds aim to keep a steady $1 per share, but that is a goal, not a promise: one fund fell below $1 in 2008 and was wound down.

T-bills are not insured either, but for a different reason: they are direct debts of the US government rather than bank deposits.

The four options

High-yield savings account

An online or high-rate savings account at an insured bank or credit union. You can withdraw any day, the rate is variable and can drop when the Federal Reserve cuts rates. It is the default home for an emergency fund.

Certificate of deposit

You lock money in for a set term at a fixed rate. Insured like any other deposit. The catch is the early-withdrawal penalty: federal law sets only a minimum (at least seven days' simple interest if you withdraw within six days of depositing) and no maximum, so each bank sets its own penalty in the account agreement. Read it before you open the CD, and pick a term that ends when you expect to need the money.

Money market fund

Usually held in a brokerage account, often as the place uninvested cash waits. The yield moves with short-term rates and is not guaranteed, and you can sell shares on any business day. How the payouts are taxed, especially by your state, depends on what the fund holds, so check the fund's tax information.

Treasury bills

Short-term US government debt sold in terms of 4, 6, 8, 13, 17, 26 and 52 weeks, from $100 and in $100 steps. You buy at a discount (or at face value) and receive the full face value at maturity; the difference is your interest. You can buy them on TreasuryDirect.gov or through a bank or brokerage. Bills can be sold before maturity, but the price you get depends on rates at the time.

The tax angle is real: the IRS taxes Treasury bill interest at the federal level, but states and localities cannot tax it. In a high-tax state, a T-bill can beat a savings account with a slightly higher headline rate.

Which one fits your goal

Worked example: $10,000 for 12 months

Assumptions for illustration only: the rates below are made up to show the arithmetic, not current market rates. Interest is earned over exactly one year with nothing withdrawn. State income tax is 5.00% on everything except the T-bill. Inflation is 3.00% for the year. Federal tax is left out because it applies to all four.

Three things stand out.

Inflation eats most of the interest. Every option earns a few hundred dollars, but in buying-power terms the gain is double digits. At 3.00% inflation and a 5.00% state tax, you need about 3.16% just to stand still before federal tax. Our guide to inflation and interest rates explains real returns in more detail.

The T-bill nearly ties the higher-rate CD. Because its interest skips state tax, the 3.70% bill works like a taxable rate of 3.89% for someone paying 5.00% in state tax.

The CD's edge disappears if you break it. Suppose you need the money after 6 months and the bank's penalty is 3 months of interest (an assumption; penalties vary). You would have earned $195.00, lose $97.50, and keep $97.50. The savings account would have paid about $175.00 over the same months, with no penalty.

Common mistakes

• Chasing the top rate with emergency money. A slightly higher yield is not worth a penalty or a slow transfer when the car breaks down.
• Assuming "money market" means insured. Check whether the product is a deposit account or a fund.
• Forgetting the $250,000 limit. It applies per bank and ownership category, not per account, so two accounts in your name at one bank share one limit.
• Ignoring taxes. Compare state-taxable rates and T-bill rates on an after-tax basis.

What to do this week

1. Look up the rate on the account where your cash sits now and write it next to the current inflation rate on our homepage.
2. Split your cash by when you need it: emergency money, money for a known date, and money waiting to be invested.
3. Keep the emergency part in an insured high-yield savings account; for money needed on a known date, compare a CD that matures in time with a T-bill of the same length, after state tax.
4. If any single bank holds more than $250,000 of your money, check your coverage by ownership category on the FDIC site.

General education, not personal financial advice. Figures are illustrations computed from the stated assumptions.