T-Bills vs Money Market Funds: After-Tax Guide 2026 | Bright Side Kit

The 60-second rule

T-bills beat the fund at the October 2026 rates — in every state. The 52-week T-bill pays 4.616%; the money market fund pays 3.84%. On $10,000 at 22% federal and 5% state, the T-bill keeps $360.05 after tax and the fund keeps $280.32: T-bills win by $79.73 (0.797 pp). Two taxes decide it: T-bill interest is taxed at federal only (state-exempt under 31 U.S.C. §3124), while a typical fund’s income is taxed at federal plus state — only part of it comes from Treasuries. The one move that narrows the gap is the Treasury-only fund: tick the box on the calculator and the fund keeps $305.76, but the T-bill still wins by $54.29 at these rates.

The math, line by line

Setup: $10,000, a 4.616% T-bill (52-week bill, Sep 29, 2026 auction), a 3.84% fund (VMFXX 7-day SEC yield, Oct 23, 2026), 22% federal, 5% state.

Line 1 — the gross. T-bill: $10,000 × 4.616% = $461.60. Fund: $10,000 × 3.84% = $384.00 (the 7-day yield is already net of expenses). The T-bill earns $77.60 more before tax — 0.776 points of rate lead, a lot in cash-yield terms.

Line 2 — the tax. T-bill: $461.60 × (1 − 0.22) = $360.05 kept (3.600%). Fund: $384 × 0.73 = $280.32 kept (2.803%). The fund loses twice — once to its lower rate, once to the state tax on its non-Treasury income.

Line 3 — the gap. $360.05 − $280.32 = $79.73 a year on $10,000; 0.797 percentage points — T-bills win. To beat the T-bill at these brackets the fund would need roughly 4.93%. Run your own numbers on the calculator whenever the rate table moves.

Why the state-tax exemption decides the duel

The federal bracket hits both sides identically — it cancels out. What survives is the asymmetric tax: your state bracket slides off the T-bill and lands on the fund’s non-Treasury income. And not all funds are equal: the default sweep VMFXX held roughly three-fifths of its portfolio in repurchase agreements in 2024–25, so only 66.61% of its 2025 income was state-exempt; the Treasury-only VUSXX was 100% exempt. That is why the calculator has a Treasury-only toggle: it separates the “which fund” question from the “bill vs fund” question. Two more traps: California, Connecticut, and New York require 50%+ in government obligations at each quarter-end before any fund income escapes state tax — a repo-heavy fund can fail entirely. And the paperwork: Vanguard reports fund income on 1099-DIV, not 1099-INT, and the form does not break out the exempt share — you must look it up in the fund’s tax supplement or you quietly overpay.

The branches, explained

Branch 1 — no-tax state (state 0%). The fund pays federal only: $384 × 0.78 = $299.52 vs the same $360.05 T-bill. T-bills win by $60.53 (0.605 pp). Removing the state tax does not flip the verdict — the 0.776-point rate lead survives on its own.

Branch 2 — California (22% federal + 9.3% state). The T-bill is untouchable: $360.05. The fund keeps $384 × 0.687 = $263.81. T-bills win by $96.24 (0.962 pp) — the exemption is worth more the higher your taxes are.

Branch 3 — shorter paper (26-week bill 4.372%). T-bill: $437.20 × 0.78 = $341.02 after tax vs the same $280.32 fund — T-bills win by $60.70 (0.607 pp). Identical mechanism at every term.

Branch 4 — Treasury-only toggle (VUSXX 3.92%, state-exempt). The fund keeps $392 × 0.78 = $305.76 — $25.44 better than the VMFXX-style result, bought purely by the exemption. The T-bill’s $360.05 still wins by $54.29 (0.543 pp). The lesson is about which fund, not bill-vs-fund.

Branch 5 — the error case. Federal + state at 100% or more and the calculator refuses — real combined brackets live well under 50%, so 100%+ means a typo.

When each one wins

T-bills win at the October 2026 rate table in every state — the rate lead is bigger than any state tax could erase — and they win on tax simplicity: one 1099-INT, no tax-supplement archaeology, no 50% quarterly rules. The catch is liquidity with a decision attached: hold to maturity or sell on the secondary market (no penalty, price moves with rates), and each roll pays the next auction’s yield.

The fund wins on frictionless liquidity: it redeems T+1, cash the next business day, no maturity decision. For an emergency fund you might tap on a random Tuesday, that convenience is worth something. It wins the math only when its after-tax yield beats the T-bill’s — roughly when the fund’s yield exceeds the T-bill rate divided by (1 − your state rate). And if you stay in a fund in any tax state, make it Treasury-only: the toggle shows the $25.44 reason why.

The three mistakes

Mistake 1 — comparing 4.616% to 3.84%. Headline-to-headline the T-bill “wins” by 0.776 points; after tax it wins by 0.797 points — the gap widens, because the state tax only bites the fund. Compare after-tax yields, never headline rates.

Mistake 2 — assuming all money market funds are Treasury funds. The default sweep was only 66.61% state-exempt in 2025; the Treasury-only fund was 100%. Treating “money market fund” as one tax category costs a 5%-state saver $25.44 per $10,000.

Mistake 3 — reporting fund income like bank interest. It arrives on 1099-DIV, and the exempt share is not on the form — pull the fund’s tax-supplement percentage yourself, or pay state tax on income the law exempts.

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