The State Tax Illusion Behind Headline APY
APY marketing compares gross numbers. IRS Publication 550 treats interest from banks and Treasury securities as taxable income at the federal level—but many states exempt US government interest while fully taxing HYSA earnings. That is the core of t-bill vs hysa math: not risk drama, but which number survives your state return.
Tax-equivalent yield asks: what HYSA rate would match a T-bill after state tax? In a high bracket, a 5.0% T-bill can beat a 5.5% HYSA even though the sticker looks worse. Run your state and bracket in the Treasury vs HYSA Calculator instead of guessing from banner ads.
- Headline APY: Gross bank marketing number—before federal and state tax.
- After-tax yield: What you keep—state exemption on Treasuries is the swing factor.
- FDIC vs sovereign: HYSA balances are bank-insured; T-bills are US government obligations—different safety labels, both common for cash.
When T-Bills Beat HYSA After Tax
The crossover depends on your state rate and bracket. Zero-income-tax states (Texas, Florida, Washington, etc.) often make the math a wash—then convenience and transfer speed may decide. In California or New York–class brackets, the state exemption frequently dominates.
Buying is straightforward: TreasuryDirect for direct purchases or most brokerages for T-bill ladders and secondary-market sales before maturity. HYSA still wins when you need instant checking transfers for bills due tomorrow—liquidity is part of return.
Parking quarterly tax estimates from gig work? T-bills are a common short-term vessel—pair with side hustle tax truth so you are not surprised when 1099 income has no withholding. Even optimized cash yields do not build wealth—they preserve purchasing power; check real returns with the Inflation Adjustment Tool.
Where Tax-Free Cash Actually Belongs
Split buckets: checking for bills within 48 hours, HYSA for immediate emergency top-ups, T-bills or ladders for tax-efficient cash you will not touch for weeks or months. See emergency fund vs sinking funds so vacation money is not mixed with rent insurance.
If you are paycheck to paycheck, prioritize transfer speed over squeezing 0.3% after tax. If buffers are solid, tax-equivalent optimization on idle cash is worth an afternoon—not a daily hobby. Browse money tools and revisit rates when the Fed moves—H.15 releases show how fast headline yields shift.
Neither choice is moral superiority—just after-tax math, liquidity needs, and how much complexity you will maintain. Re-run the comparison when your state residency or marginal bracket changes.