Every “best savings rates” comparison ranks by headline APY. Almost none of them mention the variable that can reorder the entire list: taxes — specifically, that interest from US Treasury bills is exempt from state and local income tax, while bank interest isn’t.
If you live in a state with an income tax, the lower headline rate sometimes wins. Here’s the actual arithmetic.
The three vehicles in one paragraph each
High-yield savings account (HYSA): a bank account paying a competitive floating rate. Fully liquid, FDIC-insured, rate can change any day. The default home for an emergency fund.
Certificate of deposit (CD): you lock money at a bank for a fixed term at a fixed rate. FDIC-insured; leaving early costs a penalty, typically several months of interest.
Treasury bills: short-term US government debt (4 to 52 weeks), bought at a discount through a brokerage or TreasuryDirect. Backed by the federal government, and — the part that matters here — interest is exempt from state and local income tax. How bills are priced at a discount and sold at auction is explained in what Treasury bills are and how they work.
The math nobody runs
$10,000 for a year. Illustrative rates deliberately set close together — HYSA 4.0%, 12-month CD 4.2%, T-bills 4.1% — with the CD given the highest headline on purpose; none is a current quote. Saver pays 24% federal and lives in a 6% income-tax state.
| Headline | Gross interest | Taxed at | After-tax | Effective rate | |
|---|---|---|---|---|---|
| HYSA | 4.0% | $400 | 30% (fed+state) | $280 | 2.80% |
| CD | 4.2% | $420 | 30% (fed+state) | $294 | 2.94% |
| T-bill | 4.1% | $410 | 24% (fed only) | $311.60 | 3.12% |
The T-bill wins with the middle headline rate. The state exemption is worth roughly the state tax rate times the yield — invisible on every comparison chart, real on every tax return.
Three qualifiers, honestly stated: in a no-income-tax state the exemption is worth nothing and the CD wins this table. In a high-tax state the T-bill’s edge grows well beyond this example. And at small balances the absolute dollars are modest — on $10,000 the T-bill beats the CD by about $18/year here; on $100,000 it’s about $180.
The early-exit asymmetry
The tax angle is the underrated difference; the exit terms are the misunderstood one.
Breaking a CD costs you interest. A common structure for a 1-year CD is a penalty of roughly three months of interest, though terms vary meaningfully by bank — read yours before you buy. On our 4.2% CD, exiting at month five means roughly $175 earned minus a $105 penalty: net about $70, an effective annualised 1.68% — less than half the HYSA’s 4.0% headline rate.
T-bills have no penalty — but they have a market. Sell before maturity and you get the market price, which can be slightly more or less than you paid if rates moved. For 4–26 week bills the swing is small, but it is not zero, and nobody refunds you a “penalty” because there wasn’t one — you simply got the price.
The HYSA’s exit cost is zero. That’s its entire argument, and for money that might be needed on a Tuesday, it’s decisive.
When each one actually fits
| Money | Vehicle | Why |
|---|---|---|
| Emergency fund | HYSA | Exit cost zero; the fund’s job is availability, not yield |
| Known expense, known date (tuition in 9 months) | CD or T-bill matched to the date | Lock the rate; no exit needed if the date is real |
| Known expense, income-tax state | T-bill ladder | The exemption stacks with the rate lock |
| “Parking” cash while deciding | HYSA or 4-week T-bills | Flexibility dominates |
| Rate expected to fall | CD or longer T-bill | Fixed beats floating on the way down; HYSA rates follow the market down quickly |
| Rate expected to rise | HYSA or 4–13-week T-bills | Short bills roll over at new rates within weeks; a long lock misses the rise |
A note on ladders, since the word gets used as magic: buying T-bills or CDs in staggered maturities (every 4–13 weeks) is just a way to get most of the fixed-rate benefit while never being more than a few weeks from cash. It’s a fine technique and a boring one, which is a compliment — and it is the sensible default when you cannot tell which of the last two rows you are in. The Fed cut rates six times across 2024 and 2025, then raised them in September 2026; direction is not something to bet on. Which bill terms can be spaced evenly, and how a ladder is kept rolling, is worked through in building a Treasury bill ladder.
Bottom line
The ranking that matters is after-tax, after-exit-terms, for your state and your date certainty — not the headline table. The one-minute version: emergency money goes in the HYSA regardless; dated money goes fixed; and if your state taxes income, run the T-bill exemption math before defaulting to the shiniest CD rate, because a smaller number sometimes pays more.
CentSheet publishes educational content, not personalised financial advice. Rates shown are illustrative, not current quotes; tax treatment described is general and not tax advice for your situation. Updated 24 September 2026.
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