Treasury bills are short-term government securities that often yield as much as or more than high-yield savings accounts. The interest is exempt from state and local taxes, which can make the effective return even better. The catch: your money is tied up until the T-bill matures, anywhere from 4 weeks to 52 weeks. For savings you won't touch for a few months, T-bills deserve serious consideration.
What Are Treasury Bills?
T-bills are short-term debt instruments issued by the U.S. Department of the Treasury. You buy them at a discount and receive the full face value at maturity. The difference is your return. For example, you might pay $9,750 for a $10,000 T-bill maturing in 26 weeks, earning $250 in interest.
They come in terms of 4, 8, 13, 17, 26, and 52 weeks. The minimum purchase is $100, making them accessible to nearly everyone.
| Feature | Treasury Bills | High-Yield Savings |
|---|---|---|
| Current rates (approx) | 4.2% - 4.8% | 3.8% - 4.5% APY |
| Liquidity | Locked until maturity (or sell on secondary market) | Withdraw anytime |
| State/local tax | Exempt | Taxable |
| Federal tax | Taxable | Taxable |
| FDIC insured | No (backed by full faith of U.S. government) | Yes ($250K) |
| Minimum | $100 | Usually $0 |
| Best for | Money you won't need for 4-52 weeks | Emergency fund, flexible savings |
Key Takeaways
- T-bills often yield more than HYSAs, especially after state tax savings
- State tax exemption adds 0.3% - 0.8% effective yield in high-tax states
- No FDIC, but backed by the U.S. government (considered risk-free)
- Use both: HYSA for emergency fund, T-bills for planned savings
The State Tax Advantage
This is where T-bills pull ahead for many people. Interest from Treasury securities is exempt from state and local income taxes. If you live in a state with high income taxes like California (up to 13.3%) or New York (up to 10.9%), this exemption significantly boosts your effective return.
Say a HYSA pays 4.3% APY and a 26-week T-bill yields 4.5%. In California, the HYSA's after-state-tax return drops to about 3.73%, while the T-bill stays at 4.5%. That's a gap of 0.77 percentage points, entirely from the tax benefit.
In states with no income tax (Texas, Florida, Nevada, etc.), the advantage disappears and T-bills compete purely on rate.
How to Buy T-Bills
TreasuryDirect.gov is the government's direct purchase platform. You create an account, link your bank, and bid at auction. The process is free, but the website is clunky and selling before maturity requires transferring to a brokerage account first.
Brokerage accounts at Fidelity, Schwab, or Vanguard are generally easier. You can buy T-bills on the secondary market or at auction, and selling before maturity is straightforward. Most brokerages charge no commission on Treasury purchases.
When to Use Each
- Emergency fund: Keep it in a HYSA. You need instant access for genuine emergencies.
- Savings for a known expense in 3-6 months (tax bill, vacation, tuition): T-bills can work well here. You know when you'll need the money, so match the T-bill term to your timeline.
- Long-term savings beyond 1 year: Consider CD ladders or investment accounts instead.
- Split approach: Many savers keep 3 months of expenses in a HYSA and put anything beyond that into T-bills rolling at different maturities.
Risks to Consider
T-bills are considered one of the safest investments in the world. The U.S. government has never defaulted on Treasury obligations. However, two minor risks exist:
Interest rate risk: If rates rise after you buy a T-bill and you need to sell early, the market value drops slightly. Holding to maturity eliminates this risk entirely.
Inflation risk: Just like a HYSA, if inflation exceeds your T-bill rate, your purchasing power declines. For protection against inflation specifically, look into TIPS (Treasury Inflation-Protected Securities).
Bottom Line
T-bills and HYSAs aren't competitors; they're complements. Use a HYSA for money you might need at a moment's notice. Use T-bills for money you're parking for a few months and want to earn a slightly better return, especially if you live in a high-tax state. The combination gives you both liquidity and optimized yield.