Interest on a Treasury bill (T-bill) is free of state and local income tax, but savings account interest isn’t. Multiply your savings account’s rate by one minus your state and local tax rate. If a T-bill yields more than that, it’s the better place for cash you won’t need for a few months.
That math matters most once your cash is already in a high-yield savings account and you’re looking for the next step. The account’s rate, like the rate on a certificate of deposit, is quoted before your state takes its cut, so a straight rate comparison flatters it.
A Treasury bill is short-term federal debt with a term of four weeks to a year. You buy it below face value, the amount it repays, and get the full face value when the term ends. The gap is your interest, and only the IRS taxes it.
To compare, multiply the savings account’s APY, its annual return with compounding, by one minus your combined state and local income tax rate. In a state that taxes interest at 6%, you keep 94% of the account’s interest, so a T-bill yielding 94% of the savings APY breaks even. If your state has no income tax, the higher rate wins outright.
For the T-bill side, use the coupon-equivalent rate in Treasury’s daily bill-rate table or the yield your brokerage quotes. It’s figured on the price you pay. The bank-discount rate beside it is figured on face value and runs lower.
TreasuryDirect, the Treasury’s own site, sells bills at auction in $100 increments with no fees. Selling early is the hard part there. You must hold a bill 45 days before you can transfer it to a broker to sell, which effectively locks the shortest bills until they mature. Brokerages such as Fidelity and Vanguard bid in the same auctions at no charge online and can sell a bill before maturity at the day’s market price.
Either way, the money is committed until the bill matures unless you sell, and a sale can bring less than you paid. Pick a term that ends before you’ll need the cash, and you won’t have to sell at all.
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