When “Tax-Free” Isn’t Free — and When It Is
Asymmetry Observation: When “Tax-Free” Isn’t Free — and When It Is
Investors often assume tax-exempt money market funds are automatically superior for high-income clients.
They aren’t.
Not because tax efficiency doesn’t matter — it does — but because asymmetry lives in the math, not the label.
The decision isn’t about taxable vs. tax-free. It’s about where the after-tax crossover actually occurs.
The Hidden Break-Even
According to Crane Data, the highest-yielding taxable money market funds are currently paying roughly 3.8%, while the top tax-exempt money market funds are closer to 2.2%.
That spread matters.
The question isn’t “Do I pay a lot in taxes?” The question is:
At what marginal tax rate does 2.2% tax-free beat 3.8% taxable?
The math gives us the answer.
The break-even marginal tax rate is roughly 41%.
Below that level, taxable money funds still deliver more after-tax income. Above that level, tax-exempt funds finally begin to dominate.
Why This Trips Investors Up
Most investors anchor on federal brackets.
But federal taxes alone usually aren’t enough to clear that hurdle.
Even at the top federal bracket, you’re still below the crossover point.
The advantage only appears when state taxes, surtaxes, and stacking effects push the all-in marginal rate high enough.
This is where asymmetry shows up.
Not in the headline yield. Not in the product name. But in how tax structure interacts with return structure.
This Is a Geometry Problem, Not a Preference Problem
Tax-exempt funds cap upside in exchange for certainty.
Taxable funds offer higher raw yield but introduce a tax drag.
The decision isn’t ideological. It’s structural.
If your marginal tax rate is below the break-even point, choosing tax-exempt actually locks in a lower outcome. The certainty feels good — but the math is working against you.
Above the break-even point, the geometry flips. The tax drag overwhelms the yield advantage, and tax-exempt income becomes the asymmetric choice.
The Real Lesson
This isn’t about money market funds.
It’s about decision errors that come from labels instead of math.
“Asymmetric” doesn’t mean aggressive. It means understanding where outcomes bend — and where they don’t.
Tax-free only becomes asymmetric after the crossover.
Before that, it’s just comfort masquerading as prudence.
And comfort has a very real opportunity cost.
As always, the edge isn’t found in avoiding taxes at all costs. It’s found in knowing exactly when the structure changes — and positioning capital accordingly.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, a registered investment adviser. He serves as portfolio manager of ASYMMETRY® Managed Portfolios, a separately managed account program with trade execution and custody provided by Goldman Sachs Custody Solutions.
The observations shared in ASYMMETRY® Observations are for general informational purposes only and do not constitute investment advice or a recommendation to buy or sell any security. The content is not intended to provide a complete description of Shell Capital’s investment process or strategies and should not be relied upon in making investment decisions.
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