Treasury Bills vs. High Yield Savings Accounts: The Tax Angle Most People Miss
Purse Strings Approved Professional Blog Series
Treasury Bills vs. High Yield Savings Accounts: The Tax Angle Most People Miss
Robert Cucchiaro, CFP® President at Summit Wealth & Retirement Partners
If you’re parking cash for an emergency fund, a home down payment, or any other near-term goal, you’ve probably heard the pitch for High Yield Savings Accounts (HYSAs). The rates have been attractive in recent years, and the ease of use is hard to argue with.
But, a lesser-known alternative called Treasury Bills are worth understanding. The difference between the two comes down almost entirely to taxes.
What Is a Treasury Bill?
A Treasury Bill (T-Bill) is a short-term debt instrument issued and backed by the U.S. federal government. They come in terms of 4, 8, 13, 17, 26, and 52 weeks, making them a flexible option for cash you don’t need immediately, but want working (aka growing) for you.
T-Bills don’t pay traditional interest. Instead, they’re sold at a discount to their face value, and mature at full (par) value. The difference between what you paid and what you receive at maturity is your return.
Here’s the formula to calculate the purchase price:
- Price = Face Value × (1 − (Discount Rate × Days to Maturity) / 360)
- For example, a $10,000 four-week T-Bill with a discount rate of 3.59% would be priced at: $10,000 × (1 − (0.0359 × 28) / 360) = $9,972.08
You pay $9,972.08 today and collect $10,000 in four weeks — a gain of $27.92. That’s your “interest.”
The State & Federal Tax Pictures
Federal Level
At the federal level, T-Bill income is treated as ordinary income and reported on Form 1099-INT. You’ll owe federal income tax on those earnings at your marginal rate, the same as you do on interest earned in a savings account.
T-Bills start to pull ahead at the state and local level.
State Level Tax Advantage
Under federal law, interest income earned from U.S. Treasury securities (including T-Bills, notes, bonds, TIPS, and Floating Rate Notes) is exempt from all state and local income taxes. This is an explicit federal protection that has been in place for decades.
A High Yield Savings Account offers no such protection. Interest earned in a HYSA is fully taxable at both the federal and state level.
This distinction is most valuable in high-tax states where the T-Bill exemption can meaningfully shift your after-tax math. People in high tax states (like California at over 13% or New York over 10%) benefit most, but it still matters in every state that collects income tax, including Idaho.
What This Means for Idaho Residents
Idaho has a flat state income tax rate of 5.3% on taxable income and does not permit local income taxes, so there’s no city or county layer to worry about.
Critically, Idaho follows the federal treatment of U.S. government obligations: interest income from T-Bills (and other U.S. obligations) is explicitly exempt from Idaho state income tax.
This puts Idaho residents in the same favorable position as savers anywhere else in the country, since the 5.3% state bite doesn’t apply to T-Bill income.
That being said, Idaho’s flat rate is lower than high-tax coastal states, so the raw dollar advantage of T-Bills is somewhat narrower here than it would be in California or New York. But it’s still real money, especially as your cash balance grows.
Running the Numbers: HYSA vs. T-Bill in Idaho
Let’s look at a realistic Idaho scenario.
Assume:
- Federal marginal tax rate: 22%
- Idaho state tax rate: 5.3%
- HYSA yield: 4.0%
- T-Bill yield: 3.75% (slightly lower, as is often the case)
- HYSA after-tax yield: 4.0% × (1 − 0.22 − 0.053) = 4.0% × 0.727 = 2.91%
- T-Bill after-tax yield (state-exempt): 3.75% × (1 − 0.22) = 3.75% × 0.78 = 2.93%
In this example, the T-Bill edges out the HYSA on an after-tax basis despite having a lower headline rate.
That difference may seem insignificant until I walk you through a real-life example we just encountered.
The $5 Million Money Market Mistake
We recently met with a prospective client, an Idaho resident with over $5M sitting in a standard money market fund. On the surface, it looked like a reasonable place to park liquid cash thanks to its competitive yield, low risk, and easy access.
What he didn’t realize was that the fund was fully taxable at the Idaho state level.
This is more common than you’d think, and it stems from a widely misunderstood distinction in how money market funds work.
Not All “Government” Money Market Funds Are State-Tax-Exempt
Many money market funds, even some with “treasury” or “government” in their name, hold a significant portion of their assets in repurchase agreements (repos).
A repo is essentially a short-term collateralized loan between financial institutions, often backed by government securities but not a direct government obligation itself.
That distinction matters enormously at tax time because repos are fully taxable at both the federal and state level, while direct Treasury holdings are state-exempt.
Industry data suggests that on average, large government money market funds hold roughly half their assets in repos and half in Treasuries, meaning a substantial portion of what looks like “government” yield is actually fully state-taxable income.
Some popular funds marketed as treasury-focused are nearly 100% repos. You would never know this from the fund’s name or marketing materials alone.
What He Was Losing Every Year
Let’s run the numbers for this client.
Assume the $5M was earning a 4.5% yield in a fully state-taxable money market fund, and his Idaho state tax rate was 5.3%:
- Annual interest earned: $5,000,000 × 4.5% = $225,000
- Idaho state tax owed on that interest: $225,000 × 5.3% = $11,925 per year
That’s nearly $12,000 annually paid to the Idaho State Tax Commission on income that could have been entirely exempt if it was held in a different vehicle.
Over five years, assuming similar rates, that’s roughly $60,000 in avoidable state taxes. That number doesn’t include the compounding effect of those dollars staying invested rather than going to the state.
What He Should Have Done Instead
The fixes are straightforward and don’t require taking on any additional risk or sacrificing meaningful yield:
1. Option 1: Direct T-Bills
Purchase Treasury Bills directly through TreasuryDirect.gov or a brokerage account. At a comparable 4.5% yield, the full $225,000 in annual interest would be exempt from Idaho state income tax.
Federal taxes still apply, but the $11,925 state liability disappears entirely.
2. Option 2: A Treasury-Only Money Market Fund
For investors who want the convenience of a money market fund with daily liquidity, certain funds invest exclusively (or near-exclusively) in direct Treasury obligations rather than repos.
Examples include Vanguard’s Treasury Money Market Fund (VUSXX), which has historically maintained 100% of its income as state-tax-exempt, and Schwab’s equivalent Treasury-focused fund.
These offer nearly identical liquidity to a standard money market fund while keeping your state tax exemption.
For either to work, you need to verify the fund’s composition before investing.
Even if you do this, the 1099 produced by your brokerage company won’t alert your tax preparer that this is the case, so they might end up reporting taxable interest at the state level inadvertently.
This is where having your CFP (Certified Financial Planner) and your CPA (Certified Public Accountant) work side-by-side can benefit you. In this case, to the tune of almost $12,000 per year!
The Broader Lesson
This client had a sophisticated financial situation, worked with professionals in other areas, and still had millions of dollars in the wrong wrapper for years.
And yet, he still made this invisible mistake.
High income, high net worth families need a team of Advisors that specializes in these kinds of situations.
For many families, Summit Wealth & Retirement has been that team for 40 years.
Disclaimer
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy.
Robert Cucchiaro, CFP®
President at Summit Wealth & Retirement Partners
Robert Cucchiaro, CFP® is a Purse Strings Approved Professional and President of Summit Wealth & Retirement Partners in Eagle, Idaho. He helps women and families create clear, practical financial plans with a focus on retirement planning, wealth protection, tax strategies, and long-term financial confidence. With a fiduciary, education-first approach, Robert is committed to making financial planning feel more understandable, approachable, and empowering.
