T-bills vs high-yield savings, after tax

Q: Are Treasury bills tax free?

Not fully. T-bill interest is subject to federal income tax and exempt from state and local income tax, according to TreasuryDirect. Selling before maturity is treated differently, so check your state’s handling of that case.

Q: If I live in a state with no income tax, does any of this matter?

No. With no state income tax, the tax-equivalent yield equals the bill’s own yield, so comparing the headline rates is correct.

Q: Does the formula assume anything?

It assumes state tax is not deducted on the federal return, which is true for anyone taking the standard deduction. Itemisers see a slightly smaller gap.

Q: Why does the interest not compound inside a T-bill?

A bill pays once at maturity, so nothing compounds within it. Rolling bills over does compound, but at future rates that cannot be known.

Comparing the two headline rates is the wrong sum for anyone who pays state income tax. Here is the right one.

6 minute read

T-bills vs high-yield savings looks like a one-line comparison: whichever rate is higher wins. For anyone who pays state income tax, that is the wrong sum, because the two are not taxed the same way. This page works through the right one, and the Treasury bill calculator runs it on your own rates.

Are Treasury bills tax exempt?

Partly. TreasuryDirect, the Treasury's own site, puts it plainly on its Treasury bills page: federal tax is due on the interest, and there are no state or local taxes on it. The exemption comes from federal law, which protects US government obligations from state taxation (31 U.S.C. § 3124).

Interest from a savings account gets no such protection. Your state taxes it as ordinary income, on top of the federal tax both of them pay. So the federal part is a wash, and the whole difference between the two is your state rate.

The sum that makes them comparable

The fair question is: what would a savings account have to pay to leave you with the same money after tax as the bill? Setting the two after-tax returns equal gives the tax-equivalent yield:

bill yield × (1 − federal rate) ÷ (1 − federal rate − state rate)

Compare that with the savings APY, not the bill's own yield. It only differs from the bill yield when you have a state rate; with none, the headline comparison was already fair.

Worked on the current curve

Take the 26-week point on the Treasury par yield curve published on 24 September 2026: 4.34%. Suppose a federal marginal rate of 22%, one of the 2026 brackets, and the state rates below. Those tax rates are illustrations — use your own. Here is the savings APY that would match the bill after tax:

State rate 0%: a savings account would need 4.34%
State rate 3%: a savings account would need 4.51%
State rate 5%: a savings account would need 4.64%
State rate 7%: a savings account would need 4.77%
State rate 9%: a savings account would need 4.91%

Every point of state tax raises the bar a savings account has to clear, and each point raises it a little more than the one before, because it comes out of what the federal tax has already left.

That is how the ranking can flip. Say a savings account is paying 4.5%. On the headline it beats the bill's 4.34%. With a 5% state rate, the bill is worth 4.64% in savings terms — so after tax, the bill comes out ahead, which is the opposite of what the headline said.

How much do T-bills pay, in dollars?

A bill has no coupon. You buy it for less than face value and are paid face value at maturity, and the difference is your interest. On $10,000.00 for 26 weeks at 4.34%, that is about $216.41 before tax. After 22% federal tax it is about $168.80, and the state takes nothing.

Two caveats about the yield itself. The curve figure is a market yield on a bond-equivalent basis, not an auction result, so what you actually get at auction will differ a little. And it is not the “bank discount rate” bills are sometimes quoted at, which reads lower than what you earn because it divides by face value and uses a 360-day year.

T-bills vs CDs, and money market funds

A bank CD is a bank deposit, so its interest is treated like savings interest here: taxed by your state as well as federally. The same formula applies — compare the CD's rate with the bill's tax-equivalent yield, not its headline one. The difference that has nothing to do with tax is that a CD usually charges a penalty to get out early, while a bill can be sold, at whatever the market pays that day.

A money market fund is harder. What it pays depends on what it holds, and how much of its income your state treats as exempt depends on your state's rules. This site does not guess those, so it does not put a number on it.

What the arithmetic leaves out

A savings account is instant-access. A bill locks the money up until maturity unless you sell, and selling early can return less than you paid. When the bill matures, you roll into a new one at whatever the rate is then, which nobody knows today. Those differences can matter more than a few hundredths of a percent, and no formula prices them. The comparison above tells you which pays more after tax. It does not tell you which is right for your money.

If you are not sure which federal rate to use, the take-home pay calculator shows your marginal rate from the IRS's 2026 brackets.

Common questions

Are T-bills better than a high-yield savings account?

Neither is better in general. After tax, a bill pays more whenever its tax-equivalent yield is above the savings APY — and with state income tax, that can be true even when the bill's headline yield is lower. What the sum cannot weigh is access: a savings account is instant, a bill is not.

Are Treasury bills tax free?

Not fully. The interest is taxed federally and exempt from state and local income tax, as TreasuryDirect states. Selling a bill before it matures is treated differently from holding it to the end, so check how your own state handles that case.

If I live in a state with no income tax, does any of this matter?

No. With a state rate of zero, the tax-equivalent yield is simply the bill's own yield, and comparing the two headline rates is the correct comparison.

Does the formula assume anything?

Yes: that you do not deduct your state tax on your federal return. That holds for anyone taking the standard deduction. If you itemise, the true gap is a little smaller than this formula shows.

Why does the interest not compound inside a T-bill?

A bill pays once, at maturity, so there is nothing to reinvest along the way. Rolling one bill into the next does compound, but at rates that are not known yet, so this page does not model it.

Not tax or investment advice. The yield is the 26-week constant-maturity figure published by the U.S. Department of the Treasury on 24 September 2026, not an auction result or an offer. Tax rates are illustrations; use your own. State rules on the exemption vary.