High-Yield Savings vs. CDs vs. T-bills: What You Actually Keep After Tax

The best savings rate on the comparison table is not the rate you earn. It’s the rate before the IRS and your state take their cut, and those cuts differ by account. Run the after-tax numbers and the winner changes for a lot of readers, especially anyone in a state with an income tax. The fight over a few basis points also turns out to be smaller than it looks. The real decision is somewhere else.

The rate in the ad is a pre-tax number

Interest from a savings account or CD is taxable income, and the IRS requires you to report it whether or not you receive a 1099. Most states tax it too. Treasury bills are different.

Federal, yes. State and local, no. The IRS says Treasury bill, note, and bond interest is taxed federally but exempt from all state and local income taxes. The exemption comes from federal statute: under 31 U.S.C. §3124, states and their political subdivisions can’t tax federal obligations or the interest on them.

That one line of tax code does more work than most rate hunting.

When you compare, read the right column. Treasury’s daily bill rate table shows two numbers for each bill. One is the bank discount rate, which is quoted against par value over a 360-day year. The other is the coupon-equivalent yield, which is based on what you actually pay over a 365-day year. The coupon-equivalent yield is the one that lines up against a bank’s APY.

The math on $20,000

Take $20,000 you’re holding as cash. The example uses three assumed rates: 4.40% for a savings account, 4.45% for a 12-month CD, and 4.38% for a 26-week T-bill, which is near where the bill’s coupon-equivalent yield sat at the end of September. Plug in the rates you’re actually being offered.

The tax side is built for a married couple earning about $85,000. For 2026, married couples filing jointly get a $32,200 standard deduction. That leaves taxable income near $52,800, inside the 12% bracket that runs to $100,800 for joint filers in 2026. Add an assumed 5% state income tax.

	Savings (4.40%)	12-month CD (4.45%)	T-bill (4.38%)
Interest earned	$880.00	$890.00	$876.00
Federal tax (12%)	−$105.60	−$106.80	−$105.12
State tax (5%)	−$44.00	−$44.50	$0.00
You keep	$730.40	$738.70	$770.88
After-tax yield	3.65%	3.69%	3.85%

Lowest rate on the board. Most money in your pocket.

The T-bill beats the savings account by about $40 and the CD by about $32. That’s real money, but not life-changing money. Hold that thought.

The breakeven formula

You don’t need a table every time. Treasury interest beats bank interest after tax whenever:

T-bill yield > bank rate × (1 − federal rate − state rate) ÷ (1 − federal rate)

At 12% federal and 5% state, that works out to bank rate × 0.943. A 4.40% savings account is matched by a 4.15% T-bill, and anything above 4.15% wins.

Move up to the 22% bracket and the multiplier barely changes, to 0.936. Your state rate does most of the work.

Push the state rate to 9% and the multiplier falls to 0.898. Now a 3.95% T-bill matches that same 4.40% account. In a high-tax state, the T-bill can pay nearly half a point less and still come out ahead.

In a state with no income tax, the multiplier is 1.0. Eight states levy no individual income tax at all, including New Hampshire, which repealed its interest and dividends tax as of 2025. Washington taxes only capital gains, so its residents pay no state tax on bank interest either. In those states the exemption is worth nothing, so take the highest rate and move on.

One wrinkle: the formula assumes you take the standard deduction. If you itemize and deduct state income tax, the state’s bite on bank interest shrinks, and so does the T-bill’s edge. That matters more now that the 2025 tax law raised the SALT deduction cap to $40,000 from $10,000, with inflation adjustments.

Locking in a CD while the Fed is still hiking

The standard advice right now is to lock in a long CD before rates fall. For this moment, it’s backwards. In the Fed’s September Summary of Economic Projections, 16 participants projected at least one more hike this year.

Say you lock $20,000 in a 5-year CD at 4.50%, and savings rates climb to 4.90% within a year. Both numbers are hypothetical. You give up 0.40% a year, which is $80, for four years.

If you break the CD to chase the higher rate, you pay a penalty, and federal rules set only a floor. Regulation D requires at least seven days’ simple interest, and only on withdrawals in the first six days after deposit. Past that, the penalty is whatever your bank’s deposit agreement says, with no federal ceiling. Read the penalty schedule before you sign, not after.

Rates could fall instead, and then the CD looks smart. Nobody knows in advance, and that’s the point. A 5-year lock is a rate bet, and it’s an odd bet to make with money you might need.

T-bills sidestep the problem. Treasury issues new bills at seven maturities: 4, 6, 8, 13, 17, 26, and 52 weeks. If rates keep climbing, your next bill buys in at the higher rate automatically.

How to actually buy them

Treasury sells bills at auction through brokers, banks, or TreasuryDirect. You already have a brokerage account, so start there. Some brokerages, Schwab among them, will roll a new-issue Treasury into a fresh one at each maturity until you cancel.

TreasuryDirect works too, but getting out early is clunky. You have to hold a security there for 45 days before you can sell or transfer it, so a 4-week bill bought there can’t be sold early at all. To sell, you first transfer the security to a broker.

A Treasury money market fund is the lazy version, with daily liquidity and mostly Treasury holdings. Watch the fine print if you live in California, Connecticut, or New York. Those three states only allow the exemption if the fund held at least 50% of its assets in U.S. government obligations at the end of every quarter. Check your fund’s annual state-tax worksheet before assuming the full exemption.

T-bill interest lands on your 1099-INT. Box 3 reports interest on U.S. Savings Bonds and Treasury bills, bonds, and notes. Make sure your tax software picks it up so your state return excludes it.

The number no comparison table ranks

Go back to the after-tax yields: 3.65% to 3.85%. Now hold them against inflation. In those same September Fed projections, the median for 2026 PCE inflation is 3.7%.

That’s treading water. After tax and inflation, the best of these accounts is roughly breaking even, and the worst is slipping backward. The best cash account in America is a parking spot, not an engine.

So the $32 gap between the CD and the T-bill matters less than the question underneath it: how much of your money is sitting in cash at all? Every dollar beyond what cash is actually for is a dollar that isn’t compounding.

The move to make

Give every cash dollar one job, then match the account to the job.

Emergency fund (three to six months of expenses): high-yield savings. You need it the same day, and the tax difference on a few months of expenses is lunch money.
Known-date money (a down payment or a car in 6 to 18 months): T-bills through your brokerage, set to auto-roll. Use them if you live in a state with an income tax and the breakeven formula says they win. In a no-tax state, take whichever pays more.
Anything beyond those two jobs: that money isn’t cash. It belongs in your Roth, your 401(k), or your taxable brokerage.

Skip the 5-year CD for now. Run the formula once with your actual bracket and your state’s rate, and you’ll have your answer in about two minutes.

Sources

Kevin McKee

Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children. Lastly, Kevin holds a B.A. in Mathematics and a B.S. in Electrical Engineering.