The Fallacy of Savings Accounts
The true cost of having a high yield savings account
Growing up in the height of the 2008 financial crisis, I learned the importance of having 3-6 months of savings available at all times.
It was only later I realized this is known as an emergency fund. Typically, these funds are parked in a high-yield savings account, or HYSA, earning 2.5% to 5% interest.
Banks set their interest rates based on the Federal Reserve's rate, their desire to grow deposits, and other factors, but as of May 2026, the current rate for HYSA accounts is hovering around 3% to 3.50%. If a bank is really looking for your business, you might even see rates north of 5%, though it's pretty rare.
The tax trap
In theory, the HYSA makes complete sense. It provides a place for quickly accessible cash.
However, HYSAs are second-class citizens in almost every other way.
First, HYSAs will always pay you less than the federal government's true rate — because banks want to make money on the spread. So instead of giving a consumer 6%, they might give consumers 3.5%. Although not ideal, you're stuck with whatever they offer.
The bigger problem shows up on April 15 of the following year.
Because all the work you put in to save money is taxed as ordinary income. In high-tax states, more than half your interest vanishes to federal and state taxes.
For example, a HYSA with $50,000 earning 3.5% will generate $1,750 in interest income. In California or New York, a significant amount of that $1,750 would be lost to taxes.
Single filers
| Income | Federal | State Tax (CA) | Total Tax (CA) |
|---|---|---|---|
| $100k | $385.00 | $158.00 | $543.00 |
| $200k | $486.50 | $163.00 | $649.50 |
| $300k | $679.00 | $163.00 | $842.00 |
| $400k | $679.00 | $180.00 | $859.00 |
| $500k | $679.00 | $198.00 | $877.00 |
Married filing jointly
| Income | Federal | State Tax (CA) | Total Tax (CA) |
|---|---|---|---|
| $100k | $210.00 | $102.00 | $312.00 |
| $200k | $385.00 | $163.00 | $548.00 |
| $300k | $486.50 | $163.00 | $649.50 |
| $400k | $486.50 | $163.00 | $649.50 |
| $500k | $626.50 | $163.00 | $789.50 |
Nobody tells you this when you open the HYSA.
What can you do?
At a technical level, there isn't a true alternative to a savings account because it is essentially cash. But there are cash-equivalent options with significantly better upside.
One in particular is SGOV — an ETF that holds short-term U.S. Treasury securities. It's designed to provide a low-risk, liquid, high-yield alternative to a HYSA. Just like the HYSA, it pays out monthly.
The proceeds from SGOV are taxed as ordinary income. However, because the underlying investment is in U.S. Treasuries, you skip state and local taxes — only the federal government gets a cut.
And since the return is meant to be competitive with the HYSA, the overall value from SGOV can be much higher.
As of May 2026, Goldman Sachs has a 3.5% rate on its HYSA, whereas SGOV has a trailing yield of 3.94%.
Starting with a $50,000 balance, and after accounting for taxes and fees, SGOV puts an extra $300 in your pocket annually.
| Income | HYSA after-tax income | HYSA after-tax yield | SGOV after-tax income | SGOV after-tax yield | SGOV advantage |
|---|---|---|---|---|---|
| $100k | $1,207.00 | 2.41% | $1,507.00 | 3.01% | $300.00 |
| $150k | $1,167.00 | 2.33% | $1,463.00 | 2.93% | $296.00 |
| $200k | $1,100.50 | 2.20% | $1,389.85 | 2.78% | $289.35 |
| $250k | $960.50 | 1.92% | $1,235.85 | 2.47% | $275.35 |
| $300k | $908.00 | 1.82% | $1,178.10 | 2.36% | $270.10 |
| $400k | $891.00 | 1.78% | $1,178.10 | 2.36% | $287.10 |
| $500k | $873.00 | 1.75% | $1,178.10 | 2.36% | $305.10 |
Although SGOV is not FDIC insured, it is SIPC protected, which protects assets if the underlying brokerage collapses.
More importantly, the underlying assets SGOV invests in are U.S. Treasuries, meaning they are backed by the full faith and trust of the U.S. government.
What's your next move?
Take five minutes and check where your emergency fund actually sits.
Look at your HYSA rate, the yield your brokerage pays on idle cash, even the fund you have tucked away in a Certificate of Deposit. Then look at the after-tax yield.
Because 3.5% is only impressive until you realize what you actually keep.
Your emergency fund should be boring. It shouldn't be expensive.