Why Treasury Bills Are Worth Your Attention
For most of the past decade, Treasury bills were an afterthought. With interest rates near zero, there was little reason to bother with government short-term debt when a savings account earned the same negligible return. But when rates rose sharply starting in 2022, T-bills suddenly became genuinely attractive again — offering yields that beat most savings accounts, with the full backing of the U.S. government and a state tax exemption that adds extra value for residents of high-tax states.
Even as the rate environment evolves, T-bills remain one of the most useful tools in a conservative investor’s toolkit: safe, liquid, predictable, and often tax-advantaged compared to alternatives. This guide explains how they work and exactly how to buy them.
What Is a Treasury Bill?
A Treasury bill (T-bill) is a short-term debt security issued by the U.S. Department of the Treasury. When the government needs to borrow money for short periods, it issues T-bills to investors — essentially borrowing from the public with a promise to repay the face value at a set maturity date.
T-bills come in several maturity terms:
- 4-week (approximately 1 month)
- 8-week (approximately 2 months)
- 13-week (approximately 3 months)
- 17-week (approximately 4 months)
- 26-week (approximately 6 months)
- 52-week (approximately 1 year)
Unlike bonds that pay periodic interest, T-bills are sold at a discount to their face value and pay the full face value at maturity. The difference between what you pay and what you receive at maturity is your return. For example, you might buy a 26-week T-bill with a face value of $1,000 for $975. At maturity, you receive $1,000. Your $25 gain represents your interest income.
How T-Bill Yields Work
T-bill yields are quoted as an annualized rate so you can compare them to other investments. A 26-week T-bill priced at $975 per $1,000 face value has a discount rate of approximately 5% annualized. The actual dollar return depends on the amount invested and the maturity term.
Yields on Treasury bills are set at auction by the market. Every week, the Treasury holds auctions for new T-bills across various maturities, and the clearing yield is determined by competitive bids from institutional investors. Individual investors who submit non-competitive bids (the standard approach for retail buyers) receive the yield determined at auction, guaranteed.
This means you do not need to predict or negotiate a yield. You simply submit an order, and you receive the market rate for that week’s auction — the same rate the largest institutions receive.
T-Bills vs. High-Yield Savings Accounts
The most common comparison for conservative cash management is T-bills versus high-yield savings accounts (HYSAs). Both are very safe and offer liquidity, but with meaningful differences.
Safety: Both are extremely safe. T-bills are backed by the full faith and credit of the U.S. government. High-yield savings accounts are FDIC-insured up to $250,000 per depositor per bank. In practice, both are considered essentially risk-free for amounts within these limits.
Yield: T-bill yields and HYSA rates both track the federal funds rate, but the relationship is not identical. T-bills typically price close to or slightly above the fed funds rate. HYSAs vary by institution — some pass rate changes through quickly, others lag. In a given environment, one may be higher than the other by 0.25 to 0.75 percentage points.
State tax treatment: This is where T-bills have a meaningful structural advantage. Interest from Treasury securities is exempt from state and local income taxes. Interest from HYSAs is fully taxable at the federal, state, and local level. For someone in a high-tax state like California (top rate 13.3%), New York (8.82%), or New Jersey (10.75%), the effective after-tax yield on T-bills can be considerably higher than the nominal yield suggests.
Example: A T-bill yielding 5% for a California resident in the 9.3% state bracket has an effective after-tax yield of approximately 5% (federal taxes still apply, but no California tax). A HYSA also yielding 5% would net roughly 4.5% after California tax. That gap is real money over time.
Liquidity: HYSAs offer instant access — you can transfer money out in minutes. T-bills are less liquid: they have fixed maturity dates, and while you can sell them before maturity in the secondary market, the price depends on current rates and there may be a bid-ask spread. For emergency funds or money you might need quickly, HYSAs generally make more sense. For money you will not need for 1 to 12 months, T-bills are a strong option. For a complete breakdown of top HYSA options, see our guide on high-yield savings accounts.
T-Bills vs. CDs
Certificates of deposit (CDs) are another common comparison. CDs are offered by banks, are FDIC-insured, and have fixed terms and rates similar to T-bills. Key differences:
- T-bills are state-tax-exempt; CD interest is fully taxable at state level
- CDs often have early withdrawal penalties; T-bills can be sold in the secondary market without formal penalties (though at market price)
- T-bills require no minimum purchase at brokerage (though TreasuryDirect requires a $100 minimum); CDs vary by institution
- CD rates are set by the issuing bank; T-bill rates are set by market auction
In most environments, once you factor in the state tax advantage, T-bills are at least competitive with CDs of equivalent maturity and often superior for investors in moderate to high-tax states.
How to Buy Treasury Bills
There are two main ways to purchase T-bills as an individual investor.
Option 1: TreasuryDirect.gov
TreasuryDirect is the official U.S. government platform for purchasing Treasury securities directly from the Treasury. It is free, has no commission, and requires only a $100 minimum purchase.
Steps to buy on TreasuryDirect:
- Create a free account at TreasuryDirect.gov (requires SSN, bank account, and identity verification)
- Link your bank account for funding and receiving payments
- Navigate to "BuyDirect" and select Treasury Bills
- Choose your desired maturity (4-week, 8-week, 13-week, etc.)
- Enter the dollar amount and submit a non-competitive bid
- Your purchase is funded on the auction settlement date, and proceeds are deposited to your bank account at maturity
The main limitation of TreasuryDirect: it is not designed for active management. The interface is functional but dated, transferring T-bills out before maturity requires extra steps, and there is no mobile app. For buy-and-hold investors who plan to hold to maturity, it works well. For more flexibility, a brokerage is better.
Option 2: Brokerage Account
Most major brokerages — Fidelity, Schwab, Vanguard, and others — allow you to purchase Treasury bills through their platforms at no commission. This is the preferred method for most investors because it integrates with your existing investment accounts, offers a better interface, allows easy secondary market selling, and makes reinvestment straightforward.
At Fidelity and Schwab, you can find new-issue T-bills under the fixed income section and place a non-competitive order for the current week’s auction. You receive the auction yield, and at maturity the proceeds land in your brokerage cash balance for immediate reinvestment or withdrawal. Our guide on how to open a brokerage account covers the setup process if you do not already have one.
The T-Bill Ladder Strategy
A T-bill ladder is one of the most practical strategies for investors who want to maintain regular liquidity while earning competitive yields. Here is how it works:
Instead of putting all your money into a single T-bill, you divide it across multiple maturities. For example, with $20,000 to invest:
- $5,000 into a 4-week T-bill
- $5,000 into an 8-week T-bill
- $5,000 into a 13-week T-bill
- $5,000 into a 26-week T-bill
As each T-bill matures, you reinvest into a new 26-week bill. After the initial setup period, you have a T-bill maturing roughly every four weeks, providing regular cash flow and the ability to access money in the near future without selling anything early.
Laddering also hedges against interest rate changes. Rather than committing all your capital to a single rate for a full year, you reinvest portions at current market rates as each rung of the ladder matures.
Tax Treatment of T-Bills
T-bill interest income is:
- Federally taxable as ordinary income in the year the T-bill matures (not when purchased)
- Exempt from state and local income taxes — this is the key tax advantage over bank products
- Not subject to self-employment tax (relevant for self-employed investors)
Your brokerage will provide a 1099-INT at year end showing the interest income. On your federal return, T-bill interest is reported as interest income. On your state return, it is excluded from taxable income — most tax software handles this automatically when you indicate the income is from U.S. government obligations.
For investors holding T-bills inside a tax-advantaged account like an IRA, the state tax advantage is irrelevant (since the IRA already shields income from current taxation), so the calculus versus HYSAs changes — compare yields directly in that context.
The Risks of T-Bills
T-bills are about as close to risk-free as any investment gets, but they are not completely without risk:
Interest rate risk: If you need to sell before maturity and rates have risen since you purchased, the market price of your T-bill will be below face value. This is a real but manageable risk — avoid putting money in T-bills that you might urgently need before the maturity date, and use the ladder strategy to ensure regular maturities.
Reinvestment risk: When your T-bill matures, the proceeds need to be reinvested. If rates have fallen significantly, your next T-bill may earn considerably less than the one that just matured. This is the same risk CD holders face and is unavoidable with any short-duration instrument.
Inflation risk: If inflation exceeds your T-bill yield, your real purchasing power is declining even as your nominal balance grows. T-bills are not designed to be long-term wealth builders — they are for short-term cash management. For inflation protection in your portfolio, I bonds (which have their own tradeoffs) or inflation-protected securities (TIPS) serve that purpose. Our guide on I bonds covers that alternative in full detail.
Who Should Consider T-Bills?
T-bills make the most sense for:
- Money you know you will not need for 1 to 12 months (emergency fund tier 2, house down payment savings, tax savings set-aside)
- Investors in moderate to high state income tax brackets where the state exemption adds meaningful value
- Conservative investors who want to earn competitive yields without any credit risk
- Anyone currently holding significant cash in a low-yield savings account who has not yet set up a high-yield alternative
They are less suitable for money you might need at a moment’s notice (a HYSA is better for that) or for long-term investment capital that should be in growth-oriented investments.
Getting Started
If you have money sitting in a traditional savings account earning 0.5% or less, moving it into T-bills via your brokerage account is one of the simplest and most impactful financial moves you can make today. The setup takes 20 minutes if you already have a brokerage account.
For building a complete investment strategy that incorporates T-bills as one component of a well-structured financial plan, I Will Teach You To Be Rich by Ramit Sethi covers how to think about different accounts for different purposes — including how to treat short-term savings differently from long-term investment capital.
Your Money or Your Life by Vicki Robin takes a longer view, helping you understand how your savings — whether in T-bills, index funds, or real estate — translate into income that eventually replaces the need to work. T-bills, in that framework, are the stable foundation that keeps short-term capital safe while your long-term investments grow.
And for anyone who wants a clear, no-nonsense roadmap for building financial security from the ground up before adding investment complexity like T-bill ladders, The Total Money Makeover lays out the sequential steps that ensure every financial decision — including where you park your short-term savings — happens in the right order.