Cash on the Sidelines: How Much, What It Means, and What It Can Cost You in Taxes
You’ve seen the phrase “cash on the sidelines” — money sitting unused in liquid accounts, waiting to be deployed. But how much is really out there now? And what’s the tax drag on keeping it in “cash” vs more efficient alternatives? Let’s break it down.
How Much Cash Is Really on the Sidelines?
In money market funds alone, investors are sitting on ~ US$7 trillion.
But that doesn’t tell the full story. Total household cash (bank deposits, checking, savings, short-term instruments) is estimated near US$18.4 trillion.
Some commentary argues that the “cash on sidelines” narrative is overplayed. Money is always moving. The net amount of cash in the system doesn’t change just because one person moves from cash to equities.
In terms of proportion, the share of money market fund assets relative to total stock holdings remains within historical norms, not wildly anomalous.
What this tells you (as a planner): The monetary “firepower” is significant in absolute terms. But the potential for it to drive markets depends on investor psychology, valuations, opportunity costs, and where that cash currently sits (in low-yield accounts, CDs, etc.). It’s not a guaranteed source of buying pressure.
Cash: Opportunity Cost and Tax Cost
Holding large amounts of cash is a drag in two ways:
Low return (opportunity cost). Even with elevated interest rates, real returns may be eroded by inflation.
Tax inefficiency. Interest income from those cash or cash-equivalent vehicles is taxed (unless in tax-preferred vehicle).
Let’s compare taxable interest vs tax-exempt (or preferential) interest.
Taxable Interest vs Tax-Free Interest
What qualifies as taxable interest
Common sources include:
Bank savings, checking, money market accounts
Certificates of deposit (CDs)
Corporate bonds
U.S. Treasury interest (federal taxable, state/local tax-exempt in many cases)
Tax rules say: interest is taxable in the year it's received or becomes available to you. You get a 1099-INT if you receive $10 or more interest from a given payer.
What qualifies as tax-free or tax-preferred interest
Municipal bond interest (munis) is usually exempt from federal income tax. If the bond is issued in your state, it may also be state-tax-free.
State or local muni bonds from other states may still enjoy federal exemption but will often face state tax.
Treasury securities are exempt from state and local tax (but not federal).
Tax-deferred accounts (IRAs, 401(k)s) let interest accumulate without current taxation. When you withdraw, you pay ordinary income tax (or none, in the case of Roth).
After-tax yield comparison
To assess which interest source is better for you, compare after-tax yield.
For example: A taxable bond yielding 6 % vs a tax-exempt muni yielding 4 %:
If your federal marginal rate is 32 %, the after-tax yield on 6 % is about 4.08 % (6 % × (1 – 0.32))
The 4 % muni yield, being tax-exempt federally, is comparable (or superior) to the taxable bond in after-tax terms in that bracket.
So for higher brackets, the tax benefit of municipals becomes more meaningful.
One caveat: even tax-exempt interest is included in certain IRS calculations (e.g. for Social Security benefit taxation).
Final Thoughts
Monitor where your “cash on sidelines” is parked (which account types, maturity, yields).
Consider shifting some to tax-efficient interest vehicles (e.g. municipal bonds, state-issue munis, Treasuries) depending on your tax situation.
Use tax-advantaged accounts when possible to shelter interest income.
Don’t assume all sidelined cash will flow into equities — evaluate risk, valuation, capital deployment timing.
Use after-tax yield modeling per client to compare options.
Related: Is it a good idea to invest when the market is at an all-time high?
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About the author: Finn Price, CPFA, CEPA, is a business owner and wealth manager at Railroad Investment Group. He helps successful entrepreneurs & individuals with concentrated stock positions in their 30s, 40s and 50s build, organize, protect and transfer their wealth.
Note: this article is general guidance and education, not advice. Consult your money person or your attorney for financial, tax, and legal advice specific to your situation.
Securities and advisory services offered through LPL Financial, a registered investment Advisor, Member FINRA/SIPC.
