Treasury Bills and I Bonds

The safest short-term place for cash in the United States is not a bank. It is a loan to the federal government. Treasury bills pay a market rate for terms of a few weeks to a year, carry no credit risk that a household needs to worry about, and come with a tax advantage that many savers in high-tax states miss. I bonds add protection against inflation, with strings attached. This chapter explains how each works, when each beats a savings account or a CD, and the rules that trip people up.

How a Treasury bill works

A Treasury bill is short-term debt issued by the U.S. Treasury, backed by the full faith and credit of the federal government. Bills are sold at regular auctions in terms of 4, 6, 8, 13, 17, 26 and 52 weeks. You do not receive interest payments along the way. Instead you buy the bill for less than its face value and receive the full face value at maturity; the difference is your interest.

At auction, a household places a noncompetitive bid, which means you accept whatever rate the auction sets and are guaranteed to receive the bill. The minimum is $100, and bills are sold in multiples of that amount.

There are two ways to buy:

• TreasuryDirect, the Treasury's own website. There are no fees and you can set a bill to reinvest automatically at maturity. The catch is that you cannot sell a bill there before it matures; you would first have to transfer it to a brokerage, which takes time. Treat money in TreasuryDirect as locked until maturity.
• A brokerage account. Most large brokerages let you buy bills at auction or from other investors, usually without a commission. Bills held there can be sold on any business day at the market price, and the proceeds can sit in a money market fund until you need them.

Bill yields are quoted several ways. The figure to compare with a savings account's APY is the investment rate, also called the coupon-equivalent or bond-equivalent yield. It is a semiannual rate, so rolling a bill over twice a year earns a little more than the quoted figure: annual rate = (1 + yield ÷ 2)² − 1. For reference, the Treasury reported the 26-week bill's coupon-equivalent yield at 4.37% on September 29, 2026. Rates move daily; check the current figure before deciding.

The state tax advantage

Interest on Treasury securities is taxed by the federal government but, by federal law, exempt from state and local income tax. Interest on savings accounts, money market accounts and bank CDs is taxed by both. In a state with no income tax this makes no difference. In a state with a high income tax, it can be worth more than any rate difference you are likely to find between banks.

Take someone in the 22% federal bracket who pays 6% in state income tax, comparing a savings account and a Treasury bill that both quote 4%. After tax, the savings account keeps 72% of its interest, about 2.9% a year. The bill, rolled over twice a year, earns about 4.04%, and after federal tax alone keeps about 3.2%.

Over two years the savings account keeps $2,921 of interest after tax and the bills keep $3,201. For the savings account to match, it would need to pay roughly 4.4%. The HYSA vs T-bill after-tax calculator runs this with today's bill yield, your brackets and your state, and shows the break-even savings rate.

Two more tax details work in a saver's favour. Bill interest is taxed in the year the bill matures, not as it accrues, so a 26-week bill bought in the summer that matures in January moves that interest into the next tax year. And Treasury money market funds pass through most of the exemption, as chapter 3 described, although some states only allow it when a fund holds enough Treasuries.

I bonds: inflation protection with strings attached

A Series I savings bond pays a rate built from two parts:

• a fixed rate, set when you buy, which stays the same for the life of the bond (up to 30 years), and
• an inflation rate, reset every six months from changes in the Consumer Price Index.

Treasury announces both each May and November, and combines them as: composite rate = fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate). The composite rate cannot fall below zero. In practical terms, an I bond keeps pace with inflation and adds roughly its fixed rate on top, so its value in today's dollars grows at about the fixed rate. Here is a bond with a 1% fixed rate held five years, in today's money:

Whatever inflation does, the bond ends the five years worth about $10,510 in today's prices. A savings account offers no such promise: its rate may or may not keep up.

The strings:

• You cannot cash an I bond for the first 12 months. Not for an emergency, not at all. That alone rules I bonds out for the first year of an emergency fund.
• Cashing before five years costs the last three months of interest.
• Purchases are capped at $10,000 of electronic bonds per person each calendar year, bought only through TreasuryDirect. Treasury has at times allowed extra paper bonds bought with a federal tax refund; check TreasuryDirect for whether that option is offered this year.
• Tax is federal only, and you can defer it until you cash the bond or it reaches 30 years. Interest used for qualified higher education costs may be excluded from federal tax, subject to income limits that change each year (IRS Form 8815).

I bonds fit money you are confident you will not need for at least a year and would like to protect against inflation for five or more. When the fixed rate is close to zero, they mainly protect; when it is meaningfully positive, they also earn.

How the safe options compare