HYSA vs Treasury Bills vs Money Market Funds: the After-Tax Math

Two of the safest places a US household can park cash both pay yields in the same neighborhood, are backed by the strongest guarantees available in dollars, and turn into spendable money within a few business days. A high-yield savings account and a Treasury bill look nearly interchangeable on a rate-comparison page. The decision between them is rarely won on the headline number, though. It is won on a single line that most bank marketing never mentions: a Treasury bill’s interest is exempt from state and local income tax, and a savings account’s interest is not.

For a saver in Texas or Florida, that line is worth exactly nothing, and the choice comes down to whichever pays the higher rate this week. For a saver in California or New York, the same line can flip the ranking entirely, turning a slightly lower headline yield into the better take-home return. The head-to-head between those two is where the real decision lives. A third contender, the money market fund, sits between them on tax treatment and protection, and gets its own section below.

For a saver in a no-income-tax state, pick whichever pays more this week — in early June 2026 that was the high-yield savings account, at roughly 4.0% to 4.2% APY versus about 3.72% on the 3-month Treasury bill. For a saver in a high-tax state, run the after-tax math: because none of a T-bill’s interest is taxed by the state, the bill can deliver the higher take-home yield even when its headline rate is lower. The savings account also wins on liquidity and simplicity; the Treasury bill wins on the tax exemption and the absence of any $250,000 insurance ceiling. A Treasury-heavy money market fund sits between them: liquid the same day inside a brokerage and partly or mostly exempt from state tax, but protected by SIPC against broker failure rather than insured by the FDIC.

The one difference that usually decides it: state taxes

Interest from a high-yield savings account is ordinary income at every level. The federal government taxes it at your marginal rate, and so does your state, if your state has an income tax. Interest from a US Treasury bill is also ordinary income federally, but it is exempt from all state and local income taxes — a structural feature of federal law, not a promotional gimmick, and one the Treasury itself confirms in its tax guidance. The Internal Revenue Service treats the federal portion identically for both instruments; the divergence is entirely at the state line.

How much that exemption is worth depends on where you live. In the nine states with no broad income tax on wages and interest — Texas, Florida, Washington, Nevada, Tennessee, Wyoming, Alaska, South Dakota, and New Hampshire — it is worth zero, and the comparison collapses to a plain rate contest. In a high-tax state, it is worth real money. California’s top marginal rates run to 13.3%, with most working households landing in brackets around 9.3%. New York City residents stack a city income tax on top of the state’s. For those savers, every dollar of T-bill interest arrives untaxed by the state, while every dollar of savings interest gives some back.

One practical warning that trips up first-time T-bill buyers. A brokerage 1099 form does not always flag the state exemption for you automatically, so the exemption sometimes has to be claimed by hand as an adjustment on the state return. The money is exempt either way; you just have to make sure your tax software or preparer actually subtracts it.

A worked example: $25,000 for a California household

Numbers make the abstraction concrete. Take a California household in the 9.3% state marginal bracket holding $25,000, and use the early-June-2026 rates: 4.10% on a top high-yield savings account, 3.72% on a 3-month Treasury bill. To keep the comparison clean, this looks only at the state-tax layer, since the federal tax is identical on both and washes out.

• High-yield savings at 4.10%. Interest of about $1,025. California takes 9.3% of it, or roughly $95. Take-home interest is about $930, an after-state-tax yield of 3.72%.
• 3-month Treasury bill at 3.72%. Interest of about $930. California takes nothing. Take-home interest is about $930, an after-state-tax yield of 3.72%.

At these specific rates the two land in a near-tie for the California saver — the savings account’s 38-basis-point headline lead is almost exactly cancelled by the state tax it pays and the T-bill avoids. That is the whole point. A spread that looks decisive on a comparison page evaporates once the state tax is netted out. Shift the inputs even slightly toward the saver’s high-tax disadvantage — a 13.3% bracket, or a moment when the T-bill yield closes the gap with savings — and the Treasury bill pulls clearly ahead. Run the same example for a Texas saver, where the state rate is zero, and the savings account keeps its full 4.10% lead. Same two products, opposite answers, decided by a zip code.

The rule that falls out of this: never compare the headline APY against the headline bill yield. Convert the T-bill’s tax-free yield into its taxable-equivalent — divide it by one minus your state marginal rate — and compare that to the savings APY. For the 9.3% California saver, a 3.72% tax-free T-bill is equivalent to a roughly 4.10% taxable savings rate. For the 13.3% saver, it is equivalent to about 4.29%.

Where money market funds fit

A money market mutual fund is an open-end fund that holds very short-term, high-quality debt: Treasury bills, repurchase agreements backed by Treasuries, commercial paper and bank certificates of deposit. It aims to hold a steady $1.00 share price and pays a dividend that accrues daily and is credited monthly. Despite the name, it is an SEC-regulated investment fund, not the FDIC-insured bank money market account it is routinely confused with. The number to watch is the seven-day SEC yield each fund publishes, which follows the federal funds rate almost in real time; that target range has been 3.75% to 4.00% since the Federal Reserve raised it by a quarter point on September 16, 2026, after holding at 3.50% to 3.75% through July.

State tax treatment depends on what the fund owns. A fund holding only Treasuries, Vanguard’s Treasury Money Market Fund (VUSXX) being the cleanest example, passes the state exemption through to its shareholders. A fund that mixes Treasuries with other paper, such as Vanguard’s VMFXX or Fidelity’s SPAXX, earns a partial exemption in proportion to its Treasury income, typically 60% to 80% in normal conditions. That share moves, so check the fund’s own published breakdown before relying on it.

Run the same California household through a round-number comparison on $50,000, with a 3.5% headline yield on each option and a 9.3% state bracket:

• High-yield savings. $1,750 of interest, about $163 of state tax, $1,587 left: 3.17% after state tax.
• Treasury money market fund, assuming for illustration that 90% of its income is state-exempt. Only $175 is state-taxable, so the state takes about $16, leaving $1,734: 3.47%.
• Treasury bill. $1,750 of interest and no state tax: 3.50%.

At an identical headline rate, the exemption is worth about 33 basis points for the bill and 30 for the fund. In moderate-tax states such as Illinois, Michigan, Pennsylvania, Indiana and Ohio, it is worth roughly 10 to 20 basis points at current yields: real, but not dramatic.

Liquidity: immediate versus wait-or-sell

This is where the savings account earns its keep. The money in a high-yield savings account is reachable on a 1-to-3-business-day ACH transfer to your checking account, at the rate the bank is currently paying, with no penalty and no market risk. That makes it the natural home for an emergency fund — the cash you might need on short notice and cannot afford to see drop in value.

A Treasury bill is liquid on a different and slower schedule. Held to maturity — 4, 8, 13, 17, 26, or 52 weeks depending on the bill — it pays its stated yield in full and the cash settles to your linked account. Needed before maturity, it has to be sold on the secondary market through a brokerage, at a price that moves inversely with interest rates. Sell when rates have risen since you bought, and you take a small loss on principal; sell when rates have fallen, and you may pocket a small gain. Either way the guaranteed yield only holds to maturity. The standard fix is a ladder — staggering bills so one matures every few weeks — which restores rolling access without selling early. The mechanics of buying, laddering, and auto-rolling on the government’s own platform are covered in how to buy Treasuries on TreasuryDirect.

The honest framing: a savings account is liquid by design, a T-bill is liquid by sale. For the slice of cash you genuinely might need next week, that difference outweighs any tax edge.

A money market fund sits in the middle. Inside a brokerage it can be sold the same day, and cash reaches an outside bank in one to two business days by ACH, which suits anyone who invests periodically from the same account. One check is worth making: the fund your broker uses as its default cash position may not be the highest-yielding money market option it offers, so verify that when you open the account. Tax reporting is a Form 1099-DIV.

The paperwork around bills differs by channel. On TreasuryDirect, setting up the account can take a few days; you then submit a noncompetitive bid before the weekly auction deadline and receive the clearing yield, and the bill either rolls into a new one or pays out to your linked bank at maturity. Its interest lands on a 1099-INT for the year of maturity, while an early sale instead produces a 1099-B, with part of the gain taxed as ordinary interest under a day-count formula. Through a brokerage, the bond desk handles the auction, the bill appears in your account right after, and an early sale is an ordinary secondary-market trade.

The guarantees: FDIC $250k versus full faith and credit

Both instruments sit at the safe end of the spectrum, but the safety is constructed differently, and the difference only matters at scale.

A high-yield savings account is protected by the Federal Deposit Insurance Corporation up to $250,000 per depositor, per insured bank, per ownership category. The per-category detail is more generous than it first sounds: an individual account, a joint account, and certain trust accounts at the same bank are insured separately, so a couple can cover well past $250,000 at a single institution by structuring ownership, or simply by spreading deposits across multiple FDIC-insured banks. Within those limits the FDIC’s record is perfect — it has covered 100% of insured deposits in every bank failure since 1933.

A Treasury bill carries no insurance because it needs none. It is a direct obligation of the US Treasury, backed by the full faith and credit of the federal government, with no $250,000 ceiling and no bank sitting between you and the issuer. For a saver holding more than the FDIC limit, that is a genuine structural advantage: a $400,000 cash position fits in T-bills without splitting it across banks or juggling ownership categories. Below the insurance limit, the two guarantees are equivalent in any practical sense — both pay out in full, by different plumbing.

A money market fund is protected differently again. It is not FDIC insured. SIPC steps in if a brokerage fails and customer assets go missing, covering up to $500,000 per account with a $250,000 sublimit for cash, but it does not cover losses inside the fund. The real exposure is the fund’s credit quality: one holding Treasuries and government-backed repurchase agreements carries minimal risk, while one holding lower-quality commercial paper carries somewhat more. A fund “breaking the buck,” falling below $1.00 a share, has happened twice in modern US history. Under $250,000, all three options are about equally safe in practice.

Putting it together: who should pick which

The decision rule is short once the pieces are on the table.

Choose the high-yield savings account when you live in a no-income-tax or low-tax state, the balance is comfortably under the FDIC limit, and you value immediate, penalty-free access — which describes most households’ emergency funds and first cash tier. It is the simpler product: one linked account, one 1099-INT at year-end, rates that move within days of any Federal Reserve rate change, and nothing to administer. If you want the mechanics of the account type itself, the HYSA glossary entry covers how online banks fund the higher rate.

Choose the Treasury bill when you live in a high-tax state and the state exemption tips the after-tax math its way, when your balance exceeds the FDIC limit and you would rather not split it across banks, or when you can hold to maturity and want a yield locked at purchase rather than a savings rate the bank can cut at will. High-net-worth savers in California and New York frequently make T-bills their primary cash vehicle for exactly the tax reason worked through above.

Choose a Treasury-tilted money market fund when you already hold a brokerage account, want your cash beside the rest of your investments, and live in a state with an income tax, so the exemption helps; same-day liquidity for periodic purchases is the bonus. Direct bills usually justify their extra administration once the balance reaches roughly $50,000 or more.

For many households the answer is a layered combination: a high-yield savings account for the first one to two months of expenses, a Treasury money market fund for the next several months, and bills for the upper tier of a larger fund. For the inflation-protected slice that does not need to be liquid inside a year, the Series I savings bond guide covers a complementary vehicle. A short T-bill ladder fits that upper tier, the larger and less urgent balance where the tax exemption and the locked yield start to pay off. The broader map of where each cash tier belongs is in where your dollars actually earn. Whatever the split, the discipline is the same one bank marketing keeps quiet about: compare the after-tax yield, and let your state — not the headline rate — cast the deciding vote.

Sources

• State and local tax exemption on Treasury interest, and federal taxability: TreasuryDirect — Tax Forms and Withholding and IRS — Topic No. 403, Interest Received.
• 3-month Treasury bill yield (~3.72% as of June 5, 2026): U.S. Department of the Treasury — Daily Treasury Bill Rates and FRED — 3-Month Treasury Bill Secondary Market Rate (DTB3).
• High-yield savings account rates (~4.0%–4.2% APY no-strings; promotional rates up to 5.00% with caps/conditions; FDIC national average 0.38%) as of June 2026: Bankrate — Best High-Yield Savings Accounts and NerdWallet — Best High-Yield Savings Accounts.
• Money market fund mechanics and the seven-day yield: SEC — Money Market Funds. SIPC scope (brokerage failure, not fund losses): SIPC — What SIPC Protects.
• Federal funds target range of 3.75% to 4.00% since September 16, 2026: Federal Reserve — Open Market Operations.
• State tax exemption for federal obligations (31 U.S.C. § 3124(a)): Cornell Law — 31 U.S.C. § 3124. Bill auctions and direct purchase: TreasuryDirect — T-Bills.
• FDIC $250,000 per depositor, per bank, per ownership category: FDIC — Understanding Deposit Insurance and FDIC — Deposit Insurance FAQs.

Rates on this page reflect early June 2026 and move with the front end of the Treasury curve; if a figure looks stale against current conditions, the Treasury and rate-tracking sources above update daily, and you can flag it via contact so we reconcile it.