Most people frame the T-bill versus high-yield savings account question as a rate comparison. Check the current rates, pick the higher number, done. That’s the wrong way to think about it — because in the 22% federal tax bracket, this is actually a tax comparison, and that changes the math considerably before you’ve touched a single interest rate figure.
Here’s the part that surprises most people: T-bill interest is exempt from state and local income taxes. HYSA interest is not. In a state with no income tax — Texas, Florida, Nevada — that distinction is worth exactly zero. But in California (9.3% state rate), New Jersey (up to 10.75%), or New York City (combined rates approaching 14%), T-bills carry a structural after-tax advantage that survives even when the headline HYSA rate is higher.
For a $25,000 emergency fund parked in either vehicle, that advantage adds up to real money. Whether it outweighs the liquidity trade-off is the more complicated question, and most articles either skip the liquidity side entirely or bury it. Let’s work through the actual math — and then talk about the third option that most people overlook completely.
What Each Vehicle Actually Is
A high-yield savings account is exactly what it sounds like: an FDIC-insured savings account at an online bank (Ally, Marcus, Discover, SoFi, and others) that pays significantly more than a traditional bank. The rate floats — it adjusts with market conditions, typically tracking the federal funds rate. Your money is accessible within 1-2 business days via ACH transfer to your checking account. Interest is fully taxable at federal, state, and local levels.
A Treasury bill is a short-term U.S. government debt instrument. You buy it at a discount, hold it to maturity (4, 8, 13, 17, 26, or 52 weeks), and receive face value at the end. The "interest" is the difference between your purchase price and face value. T-bills are backed by the U.S. government — the highest-credit-quality instrument on the planet — and their interest income is exempt from state and local taxes. You can buy them directly through TreasuryDirect.gov or through a brokerage (Fidelity, Vanguard, Schwab, etc.).
A government money market fund holds primarily T-bills and similar short-term government securities. Think of it as a T-bill wrapper with same-day liquidity. More on this in a moment — it matters a lot.
The After-Tax Math in the 22% Bracket
Let’s use $25,000 and a round 5.0% yield on both vehicles to isolate the tax variable. This gives us $1,250 in gross annual interest.
In a state with a 5% income tax rate (roughly the average for taxable states), here’s what you keep:
HYSA at 5.0% — 22% federal + 5% state:
Tax = $1,250 × 27% = $337.50
After-tax earnings = $912.50
Effective after-tax yield: 3.65%
T-bill at 5.0% — 22% federal + 0% state (state-exempt):
Tax = $1,250 × 22% = $275
After-tax earnings = $975
Effective after-tax yield: 3.90%
That’s a $62.50/year advantage for T-bills on $25,000 — at identical headline rates. Not retirement-changing money, but real.
Now here’s where it gets more interesting. What if the HYSA rate is higher? Say the HYSA pays 5.2% and the T-bill pays only 4.8%:
HYSA at 5.2% — 22% federal + 5% state:
Tax = ($25,000 × 5.2% = $1,300) × 27% = $351
After-tax earnings = $949 (3.80% effective)
T-bill at 4.8% — 22% federal + 5% state-exempt:
Tax = ($25,000 × 4.8% = $1,200) × 22% = $264
After-tax earnings = $936 (3.74% effective)
Even with a 0.4% headline rate disadvantage, T-bills in a 5% state-tax bracket come within $13/year of the HYSA. If the T-bill has even a 0.1% rate advantage, it wins clearly.
The practical breakeven: when your state income tax rate exceeds roughly 4-5%, T-bills are competitive or better on an after-tax basis even when the HYSA headline rate is modestly higher. States where the T-bill advantage is most pronounced: California (9.3%), Oregon (9.9%), Minnesota (9.85%), New Jersey (10.75%), and New York City combined. Understanding how your income is taxed at different levels matters here — your marginal state rate is the one that applies to interest income, not your effective rate.
States where the T-bill advantage is zero: Florida, Texas, Nevada, Washington, Wyoming, South Dakota, and Alaska. If you live in one of these, the T-bill vs. HYSA decision collapses to a pure rate and liquidity comparison — and the HYSA often wins simply on convenience.
The Liquidity Problem Nobody Warns You About
Here’s where T-bills earn their asterisk for emergency funds. Pay attention to this part.
T-bills mature in 4, 8, 13, 26, or 52 weeks. If your $25,000 is sitting in 13-week T-bills and your furnace fails on a Thursday, your money isn’t instantly available. The specifics depend on how you hold them:
- TreasuryDirect.gov: You cannot sell T-bills early. You must hold to maturity. Period. If you bought a 13-week T-bill two weeks ago, you wait 11 more weeks. Full stop.
- Brokerage account (Fidelity, Vanguard, Schwab): You can sell T-bills on the secondary market before maturity. Settlement is typically 1-2 business days. If interest rates have risen since you bought, you’ll receive slightly less than face value — usually a small dollar amount, but not zero risk.
For a true emergency fund — money that needs to land in your checking account within 24 hours — T-bills bought through TreasuryDirect aren’t appropriate. They’re excellent for the portion of your savings that you’re confident won’t be touched for at least a month. But the first 1-2 months of expenses in your emergency cushion needs to stay in a HYSA or similarly liquid vehicle.
I thought about this the way we approached watches and warnings at the National Weather Service. A tornado watch means conditions are right for something to develop — you’re on standby. A warning means something is happening right now and you act immediately. Your emergency fund needs the same tiered structure. The "right now" money belongs in a HYSA. The standby reserves can earn better in T-bills or a money market fund.
The Third Option Most People Overlook: Government Money Market Funds
This is the vehicle that often wins the three-way comparison, and it doesn’t get nearly enough attention.
A government money market fund — like Vanguard’s VMFXX, Fidelity’s SPAXX, or Schwab’s SWVXX — holds primarily Treasury bills, repos backed by government securities, and similar instruments. The key properties:
- Yield: Typically 95-100% of the current 13-week T-bill rate. You’re not leaving much on the table versus buying T-bills directly.
- State tax treatment: Most major government money market funds qualify for state income tax exemption in most states because the majority of their holdings are direct U.S. government obligations. Fidelity publishes this percentage annually — SPAXX has historically qualified in most states. Check your fund’s annual report, because this isn’t guaranteed and varies by fund and state.
- Liquidity: Same-day or next-day access to your linked checking account. No settlement delays, no maturity constraints. This is the meaningful advantage over direct T-bill purchases.
- Safety: Not FDIC insured, but governed by SEC Rule 2a-7, which restricts holdings to the highest-quality, shortest-maturity instruments. No retail investor has ever lost money in a government money market fund. That’s a meaningful track record.
The practical setup: open a brokerage account at Fidelity or Vanguard, move your emergency fund there, and park it in the default government money market fund. Fidelity’s SPAXX is the default settlement fund for new accounts — your cash is already earning T-bill-equivalent rates without you doing anything. You can transfer to your checking account through the app, usually arriving the next business day.
This isn’t a complicated strategy. It’s a one-time account-opening decision that earns you meaningfully more after taxes with virtually no liquidity cost.
How Much Does the Difference Actually Matter on $25,000?
Let’s put concrete dollar amounts to it, assuming you’re in the 22% federal bracket and a 6% state tax bracket (a reasonable approximation for many coastal and mid-Atlantic states).
Assume 5.0% rate for all three vehicles, gross interest = $1,250:
| Vehicle | Federal Tax | State Tax | After-Tax Earnings | Effective Yield |
|---|---|---|---|---|
| HYSA | $275 | $75 | $900 | 3.60% |
| T-bill (TreasuryDirect) | $275 | $0 | $975 | 3.90% |
| Gov’t Money Market Fund* | $275 | ~$0 | $975 | 3.90% |
*State tax exemption assumes fund qualifies in your state — verify annually.
The HYSA costs you $75/year in state taxes on $25,000 — roughly the price of a nice dinner out. Over five years, that’s $375, assuming rates stay flat (they won’t, but for illustration). Not life-altering, but not zero either. If your state rate is closer to 9%, the annual gap rises to $112.50 on $25,000. On $75,000 — a larger emergency fund for a higher earner — that becomes $337.50 per year in avoidable state taxes. At that scale, it absolutely justifies the setup.
The comparison also shifts as rates change. When rates fall, a CD ladder or T-bill approach lets you lock in current rates rather than watching your HYSA rate drift down with the market. That’s a second-order benefit worth considering if you’re in a pre-retirement phase where you’re building up cash reserves deliberately.
Who Should Use What: A Practical Guide
You live in a no-income-tax state (FL, TX, NV, WA, WY, SD, AK):
The T-bill state-tax advantage is zero. Use a competitive HYSA for your full emergency fund. Shop rates — the spread between the best and worst HYSAs is often 1.0% or more, which matters a lot more than any vehicle-type advantage. Ally, Marcus, SoFi, and Discover typically run competitive rates.
You live in a state with 4-7% income tax:
A government money market fund is probably your best single answer — T-bill-equivalent yield, state tax savings, and full liquidity. Keep your HYSA as your linked funding account and use the money market fund as the primary holding for your full emergency reserve.
You live in a high-tax state (CA, NY, NJ, OR, MN at the highest brackets):
The state-tax savings are real and meaningful, especially on larger balances. Government money market fund wins for liquidity. If you’re comfortable with some maturity friction and your emergency fund is well-established (you have other resources for true day-one emergencies), direct T-bills through a brokerage are worth considering for a portion of the balance.
For true beginners:
Start with a HYSA. The rate difference versus a money market fund on $5,000 is maybe $30-50 per year. Getting your checking-to-savings allocation right matters more in the early stages than optimizing for state-tax treatment. Once your emergency fund is fully funded and stable, revisit the question.
How to Actually Set This Up
If the government money market route sounds right for your situation:
- Open a taxable brokerage account at Fidelity or Vanguard (free, takes about 15 minutes online)
- Link your checking account and transfer your emergency fund balance
- At Fidelity, cash defaults to SPAXX — you’re done. At Vanguard, purchase VMFXX manually.
- Verify the state tax exemption percentage in the fund’s annual report (usually published each January for the prior year)
- Set up a savings goal or calendar reminder to verify rates quarterly — the spread between money market funds and competitive HYSAs fluctuates.
For the T-bill direct route, head to TreasuryDirect.gov and open a free account. 4-week T-bill auctions happen every week. You set your purchase amount (minimum $100, increments of $100), submit a non-competitive bid, and receive the auction rate automatically. It’s simpler than most people expect.
If you want to understand the full mechanics of how T-bills, bonds, and savings vehicles interact with your broader portfolio, two books worth having on your shelf: The Only Investment Guide You’ll Ever Need by Andrew Tobias explains cash management and short-term instruments in plain language, and I Will Teach You to Be Rich by Ramit Sethi is still the best practical guide to setting up the right savings hierarchy from scratch.
The Bottom Line
If you’re in the 22% federal bracket and live in a state with meaningful income tax, a government money market fund is very likely the best place to park a $25,000 emergency fund — not a HYSA, and not direct T-bills through TreasuryDirect. You get T-bill-equivalent yields, probable state-tax advantages, and same-day liquidity. That’s a hard combination to beat.
If you’re in a no-tax state, a competitive HYSA is fine. The vehicle optimization conversation is worth maybe $30-50/year on a $25,000 balance. Spend that energy on shopping for the best rate instead.
The T-bill state-tax advantage is real and often underdiscussed — but it doesn’t solve the liquidity problem, which is why most people are better served by the money market fund middle ground than by buying T-bills directly on TreasuryDirect and hoping their water heater doesn’t fail mid-maturity.