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HYSAs Vs VUSXX: Has Anyone Done The Math?

racecar
  |     |   639 posts since 2014

For those living in the 42 states that have state income tax, has anyone done the math to know the point where it's better to have your (non-retirement) savings funds in VUSXX vs HYSAs?

(With an HYSA you have to pay state tax on the interest too, but not with VUSXX).

If VUSXX and your HYSA both pay 4.20%.... it makes more sense to have the funds in VUSXX (since VUSXX is state-tax-free).

But what if the HYSA pays a much better rate, say 4.60% (vs 4.20% for VUSXX)? Which one would be better in the end: 4.60% HYSA with state tax, or 4.20% with no state tax?

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2
denki
  |     |   160 posts since 2019
It depends on your state and tax bracket.

Look up your state tax rate for your income. Example, if it is $125k single, CA is 9.3%, NY is 6%, MI is 4.25%...... it should be easy to find your state's rate for your income. The IRS is 24% for $125k.

If you have nice round $50k for savings and the rates don't change......

$50k for 1 year @ 4.2% Vusxx = a $2,100 gain.
$2,100 - 24% tax (IRS, no state tax) = $1,596 gain after taxes

$50k for 1 year @ 4.6% hysa = a $2,300 gain.
If in CA: $2,300 - 33.3% tax (24% IRS + 9.3% CA) = $1,534 gain after taxes
If in NY: $2,300 - 30% tax (24% IRS + 6% NY) = $1,610 gain after taxes
If in MI: $2,300 - 28.25% tax (24% IRS + 4.25% MI) = $1,650 gain after taxes

This is just general, there are many factors.
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5
racecar
  |     |   639 posts since 2014
Thank you! Even for your $50k example it seems like it's not a huge difference between them, but I'll find out the real numbers and do the math. I'll probably wind up splitting the amount between VUSXX and an HYSA. At least Vanguard lets you link a lot of banks, so it's relatively easy to move funds back and forth if one place doesn't work out well.
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