Treasury bills and high-yield savings accounts are both popular places to keep cash, and their rates often look similar. But they work differently in ways that affect your real return: how the rate is set, whether it can change, how it is taxed, how fast you can get your money and what protects it.
How the rate is set
- Treasury yields are set by the market, at auctions and in daily trading. They move with expectations for Federal Reserve policy, inflation and demand for safe assets. See today’s 3-month Treasury rate.
- Savings account rates are set by each bank. Banks often adjust them when the Federal Reserve changes its policy rate, but they decide how much and how fast based on their own funding needs and competition.
Fixed vs. variable
When you buy a Treasury bill and hold it to maturity, your return is locked in from the day you buy. A savings account rate is variable: the bank can change it at any time, up or down. A CD sits in between: fixed for its term, usually with a penalty for early withdrawal.
Taxes
Interest from Treasury bills, notes and bonds is subject to federal income tax but exempt from state and local income taxes. Interest from bank savings accounts and CDs is generally taxable at federal, state and local levels. In a high-tax state, a Treasury can come out ahead even when its stated yield is a little lower.
Example: suppose a T-bill’s investment rate is 4.00% and a savings account pays 4.10%, and your state income tax rate is 6%. Ignoring federal tax (which applies to both), the account’s after-state-tax yield is about 4.10% × (1 − 0.06) ≈ 3.85%, while the T-bill keeps its full 4.00%. These are illustrative numbers; your situation depends on your tax brackets and whether you itemize.
Comparing the quoted rates correctly
- Savings accounts usually quote an APY, which includes compounding.
- T-bill auctions quote a discount rate, which understates the return, and an investment rate, which does not include compounding.
Our Treasury Bill Calculator shows the discount rate, the investment rate and an effective annual yield that is comparable to an APY. Never compare a T-bill’s discount rate directly with a bank’s APY.
Access to your money
- Savings accounts: withdraw any time, subject to the bank’s rules.
- T-bills: you get the face value at maturity. Bills held at a broker can be sold before maturity at the market price, which could be slightly more or less than you paid plus accrued interest. Bills held in TreasuryDirect must be transferred to a broker before they can be sold.
Safety
- Treasuries are direct obligations of the U.S. government.
- Bank deposits are protected by FDIC insurance (or NCUA insurance at credit unions) up to the applicable limits per depositor, per institution, per ownership category.
Money market funds
Money market funds, offered by brokers and fund companies, invest in short-term securities, often including T-bills. Their yields track short-term Treasury rates closely, but they are investments, not bank deposits, and are not FDIC insured. Funds that hold only Treasuries may pass through the state tax exemption on part of their income; check the fund’s tax information.
Summary
| Treasury bill | High-yield savings | |
|---|---|---|
| Rate set by | Market | Bank |
| Rate fixed? | Yes, to maturity | No, can change any time |
| State/local income tax | Exempt | Taxable |
| Access | At maturity, or sell via broker | Any time |
| Protection | U.S. government obligation | FDIC/NCUA insurance up to limits |
For when a bill pays you back, see How Treasury Bill Maturity Works. Savings bonds follow their own lockup and penalty rules, explained in Understanding Savings Bond Maturity.
This comparison is educational. Your best choice depends on when you need the money and on your tax situation.