Treasury Bills vs High-Yield Savings After State Tax

For about two years I kept my emergency fund in a high-yield savings account and never questioned it. Then I filled in my state tax return and noticed that the interest, which felt like free money, was taxed at 5.3 percent on top of the federal bill. A Treasury bill paying a slightly lower headline rate would have left me with more, and I had simply never done the arithmetic.

The question of Treasury bills vs high-yield savings is not really about which one pays more on the bank's front page. It is about what you keep after tax, how fast you can get the money out, and how much attention you are willing to give it. I track every dollar I hold in cash the same way I track my index funds, so here is how the comparison works with real numbers.

Where the two actually differ

A high-yield savings account is a bank deposit. The rate floats, the bank can change it any day, and the money is covered by FDIC insurance up to $250,000 per depositor per bank. You can move it out in a day or two.

A Treasury bill is a short loan to the US government. You buy it at a discount and get the full face value at maturity, with terms of 4, 8, 13, 17, 26 and 52 weeks. The rate is locked for that term. It is backed by the federal government directly, which is about as safe as dollars get.

The detail most people miss: interest on Treasury bills is exempt from state and local income tax. Savings account interest is not. In a state with no income tax, like Texas or Florida, that difference is zero. In California, New York or Oregon, it can be the whole story.

Running the after-tax numbers

The fair comparison is the tax-equivalent yield. Take the savings rate and strip out the state tax, then compare that to the T-bill rate. Here is how it looks on $20,000 for one year, using an illustrative savings rate of 4.00 percent and a 26-week bill at 3.90 percent rolled once. Rates move every week, so plug in today's figures before you decide.

Federal tax applies to both equally, so I left it out. The break-even is easy to work out yourself: divide the T-bill rate by one minus your state rate. At 3.90 percent and a 9.3 percent state rate, a savings account needs to pay about 4.30 percent just to tie.

Fifty dollars a year on $20,000 is not life changing. On a $60,000 house fund sitting for two years, it starts to look like a new sofa.

The counter-take: liquidity is overrated for most of your cash

The usual advice says emergency money must be available the same day, so it belongs in savings, full stop. I used to repeat that. I now think it is only half right.

Real emergencies rarely need $20,000 by tomorrow afternoon. A car repair is $1,400. A vet bill is $900. Even losing a job tends to drain cash over months, not hours. And you can sell a T-bill before maturity through a brokerage account, usually settling the next business day, at a price that moves very little on short bills.

My own setup splits it. The first month of expenses, about $4,200, stays in a savings account linked to checking. The rest sits in a ladder of 13-week bills that mature every few weeks. If something larger happens, a maturing bill is never far away. The full logic of how much belongs in that first layer is in how much should go into your emergency fund first.

Where I would not use T-bills: money you might need on a random Saturday, or anything you know you will spend within three weeks.

TreasuryDirect or a brokerage

You can buy bills two ways, and the choice matters more than people expect.

TreasuryDirect is the government's own site. It charges nothing, but it is clunky. Selling early is not possible, you have to transfer the bill to a brokerage first, which takes weeks. I have one old account there and I mostly avoid it.

A brokerage such as Fidelity, Schwab or Vanguard lets you buy at auction or on the secondary market with no commission on new issues, set up automatic rolling, and sell any business day. For anyone already holding index funds there, this is the simpler path.

A Treasury money market fund is a third option. It holds bills for you, pays close to the bill rate minus a small expense ratio, and you can sell any day. Some states tax part of the dividend, so check the fund's yearly report for the share that came from government obligations.

Small traps worth knowing

Bills are bought at a discount, so the interest shows up when the bill matures, not monthly. A 26-week bill bought in October pays out in April and is taxed in that later year.

Auto-roll is handy but easy to forget. I once let a bill roll three times while I meant to use the cash for a car down payment, and I had to sell early at a tiny loss of $11. Put a calendar reminder a week before each maturity.

Your state's tax form may not subtract the Treasury interest automatically. On mine, it is a separate line for interest on US obligations. Software usually catches it if you enter the 1099-INT correctly, but look for it.

If you want something useful to do this week: find your state income tax rate on interest, then divide today's 26-week bill rate by one minus that number. If the answer beats what your savings account is paying, move whatever part of your cash you will not need for a month. For other places to park cash, see money market accounts compared with savings or the rest of our saving and banking section.

FAQ

Are Treasury bills safer than a high-yield savings account?

Both are very safe. Savings accounts are FDIC insured up to $250,000 per bank. T-bills are backed by the federal government with no cap.

Do I pay tax on Treasury bill interest?

Yes, federal income tax. You do not pay state or local income tax on it, which is the main advantage over savings interest.

Can I lose money on a T-bill?

Only if you sell before maturity after rates rise, and on short bills the loss is usually a few dollars. Held to maturity, you get the full face value.

What is the minimum to buy a Treasury bill?

One hundred dollars at TreasuryDirect, and the same at most brokerages for new issues.