Treasury Bills vs a Savings Account
Treasury bill interest is exempt from state income tax, which is worth nothing in Texas and a good deal in California. The comparison, done properly, at three state rates.
Both hold cash safely and pay interest. One of them is taxed by your state and the other is not, and that single difference decides the comparison for anyone living somewhere with an income tax.
What a T-bill is, mechanically
A Treasury bill is a short-term government security sold at a discount to its face value, in terms of 4, 8, 13, 17, 26 and 52 weeks. Pay $24,466 for a bill with a face value of $25,000 and at maturity the Treasury pays you $25,000. The $534 difference is the interest, and nothing is paid in between.
Two consequences of that structure. First, the return is fixed the moment you buy: you know the exact amount and the exact date. Second, the quoted "discount rate" is not the yield you earn, which is why the Treasury also publishes a coupon equivalent figure. Use that one, because it is the number comparable to a savings APY.
The yield comparison before tax
On 18 September 2026 the coupon-equivalent rate on a 26-week bill was 4.27%. Take $25,000 for six months against a savings account at 4.00% APY.
| 26-week T-bill at 4.27% | Savings at 4.00% APY | |
|---|---|---|
| Interest over six months | $533.75 | $495.10 |
| Federal tax | Yes | Yes |
| State and local tax | No | Yes |
| Access before the end | Sell on the market | Withdraw |
Thirty eight dollars on twenty five thousand over six months, before considering tax at all. That is not a reason to do anything. The tax is.
Worth a note on the comparison's other end: the FDIC's national average savings rate was 0.38% in August 2026. Against that, $25,000 for six months earns about $47.50, and the bill is ahead by nearly $500 before any state tax at all. If your cash is in an ordinary branch savings account, the T-bill question is not the one to answer first: getting the cash into a competitive account is.
The state-tax exemption, and what it is worth
Interest on obligations of the United States is exempt from state and local income tax. Savings interest is not. So the savings account's return is reduced by your state rate and the bill's is not.
| State rate | T-bill, after state tax | Savings, after state tax | Bill ahead by |
|---|---|---|---|
| 0% | $533.75 | $495.10 | $38.65 |
| 5% | $533.75 | $470.34 | $63.41 |
| 9.3% | $533.75 | $449.05 | $84.70 |
The same two products, the same six months, and the advantage more than doubles between the first row and the third. Nothing about the investments changed. Only the address did.
The more useful version of this is the break-even savings rate: the APY a savings account must pay to match a 4.27% bill after state tax.
| Your state rate | Savings APY needed to match |
|---|---|
| 0% | 4.32% |
| 5% | 4.55% |
| 9.3% | 4.76% |
Carry that number rather than the dollar figures. It survives a change in rates, it takes ten seconds to check against whatever your bank is advertising, and it is the whole decision in one line.
Buying them: TreasuryDirect against a brokerage
| TreasuryDirect | Brokerage | |
|---|---|---|
| Fees | None | Usually none on Treasuries |
| Minimum | $100 | Commonly $1,000 |
| Automatic reinvestment | Yes, and it is the reason to use it | Sometimes |
| Sell before maturity | No, without transferring the bill out first | Yes, at market price |
| Sits beside your other holdings | No | Yes |
The short version: use TreasuryDirect if you intend to hold to maturity and reinvest, and a brokerage if you want the option to sell. Most people are better served by the brokerage, because the flexibility costs nothing and the reinvestment can be handled with a calendar reminder.
If you buy a sequence of them with staggered maturities you have a bill ladder, which does the same job as a CD ladder without the early-withdrawal penalty, because you sell rather than break.
Liquidity, and the secondary market
This is the real cost and it is worth being plain about it.
A savings account is money. You move it today, in any amount, and the balance is the balance. A T-bill is a security with a maturity date. Selling before that date means selling at the market price, which moves with interest rates: if rates have risen since you bought, your bill is worth less than you expected.
On a 26-week bill the effect is small, because there is not much time left for rates to matter. It is not zero, and it is why an emergency fund belongs in something you can simply withdraw. Bills are for money with a date on it, which is exactly the case for a house deposit with a known completion.
When this does not apply
If your state has no income tax. The exemption is worth nothing to you, and the comparison comes down to 4.27% against whatever you can actually get. That is a thin margin for the loss of access.
If it is your emergency fund. An emergency does not wait for a settlement date. Keep it in an insured account you can draw on.
If the amount is small. On $2,000 for six months the whole advantage is a few dollars. Not worth an account.
If the money is in a tax-sheltered account. The state exemption is the entire argument, and inside an IRA it does nothing, because nothing is taxed there in the year it is earned.
If you would not reinvest. A bill that matures into a cash balance earning nothing for two months gives back the advantage. Set the reinvestment or the reminder before you buy.
Next steps
- Find your state's marginal income tax rate on interest.
- Look up the current coupon-equivalent rate for the term you want on the Treasury's daily bill rates.
- Divide it by one minus your state rate. That is your break-even savings APY.
- Compare it against the best savings rate you can actually open.
- If the bill wins, decide between TreasuryDirect and a brokerage on whether you might need to sell.
- Set the reinvestment, or a calendar reminder for the maturity date.
Sources and assumptions. The structure of Treasury bills, the available terms and the discount mechanism are from TreasuryDirect. The 26-week coupon-equivalent rate of 4.27% is for 18 September 2026 from the Daily Treasury Bill Rates. The federal taxation of interest income is described in IRS Topic 403; the exemption of interest on obligations of the United States from state and local income tax is a feature of federal law and your state return will have a line for it. The national average savings rate of 0.38% is the FDIC's national rates published 17 August 2026. The 4.00% savings APY and the 5% and 9.3% state rates are assumptions for the worked example. This is general information and not tax advice. Checked 20 September 2026.
