The 4% Your State Can’t Touch: T-Bills vs. High-Yield Savings, With the Math for Your State

A six-month Treasury bill and a top online savings account pay nearly the same rate this month. Only one of them owes state income tax — and only one keeps its rate if the Fed cuts on Sept. 16.

On Sept. 2, a six-month Treasury bill yielded 4.00% (Federal Reserve H.15 release, Sept. 3, 2026). The best online savings account with few strings attached paid 4.01% (NerdWallet, September 2026). Call it a tie. Except that if you live in Illinois, the savings account sends about $99 of every $2,000 in interest to Springfield. The T-bill sends $0.

What’s true right now

Treasury bills are IOUs from the U.S. government that run four to 52 weeks. You pay slightly less than face value and get the full amount at maturity; the difference is your interest. Minimum purchase: $100, at TreasuryDirect.gov or through a brokerage (Kiplinger, updated June 30, 2025).

The yields as of Sept. 2, 2026: 3-month, 3.92%; 6-month, 4.00%; 1-year, 4.16% (Federal Reserve H.15, Sept. 3, 2026). The effective federal funds rate — the Fed’s benchmark — sat at 3.63% (same source), and the Fed meets next on Sept. 15–16 (FOMC minutes, July 28–29, 2026 meeting).

The tax rule is the whole story here: interest on Treasury bills, notes, and bonds “is subject to federal income tax but is exempt from all state and local income taxes” (IRS Topic No. 403, reviewed June 28, 2026). Bank and credit-union interest — savings accounts, money markets, CDs — gets taxed by both.

What this means for your wallet

Say you have $50,000 in cash earning 4% either way. That’s $2,000 a year of interest. Here’s what your state takes from the savings-account version, using 2026 state income tax rates (Tax Foundation, Feb. 17, 2026), and what it takes from the T-bill version:

• Georgia (5.19% flat): $104 from the savings account. $0 from the T-bill.
• Illinois (4.95% flat): $99 vs. $0.
• Michigan (4.25% flat): $85 vs. $0.
• North Carolina (3.99% flat): $80 vs. $0.
• Pennsylvania (3.07% flat): $61 vs. $0.
• Arizona (2.5% flat): $50 vs. $0.
• Florida, Texas, Tennessee, Nevada, South Dakota, Wyoming, Alaska, New Hampshire: no state income tax, so $0 either way (Tax Foundation, Feb. 17, 2026). Washington taxes only capital gains, so interest is untaxed there too.

States with graduated brackets — California, New York, Minnesota, Oregon and others — take more as income rises, so the gap can be larger there. Check the rate on your own state return.

Be clear-eyed about the size of this. In most states it’s $50 to $100 a year per $50,000: a nice dinner out, not a new roof. It’s not worth moving money you’ll need next month, and not worth leaving a bank that pays you more. A few accounts advertised up to 4.50% on Sept. 1 (Fortune/Curinos, Sept. 1, 2026), and 4.50% minus Illinois tax still beats 4.00% tax-free.

Where the T-bill pulls ahead is the rate lock. A savings account rate is variable; the bank can trim it the afternoon after the Fed moves, and banks typically do follow the Fed, which cut several times in late 2025 (Fortune, Sept. 1, 2026). A six-month bill bought at this week’s auction pays this week’s rate until March, whatever the Fed does on Sept. 16. And if your cash is earning the national average savings rate — 0.38%, per the FDIC figure cited by Fortune on Sept. 1, 2026 — either move is a raise of roughly $1,800 a year on $50,000.

The catch

Three things to know before you click “buy.”

Your money is spoken for until maturity. Treasury bills don’t come with an early-withdrawal option the way a CD does. If you buy at TreasuryDirect and need the cash before maturity, you’d have to move the bill to a brokerage and sell it on the secondary market, where you may face a minimum, a bid-ask spread, or a commission (Kiplinger, June 30, 2025). Pick a term you can actually wait out — four weeks is a fine place to start.

It’s not FDIC-insured — and that’s fine. A T-bill is a direct obligation of the U.S. Treasury, with no $250,000 cap and no bank in between.

The federal side doesn’t change. T-bill interest still arrives on a 1099 and still counts on your federal return, same as bank interest (IRS Topic No. 403). If you’re watching your income for Medicare premium (IRMAA) purposes, this doesn’t help there.

One scam-shield note: the Treasury does not call, text, or email to sell you T-bills, and nobody needs to “help you register.” You buy them yourself at TreasuryDirect.gov or through a brokerage you already use. Anyone offering to do it by phone is selling something else.

The takeaway

If your cash already earns 4% or better at a bank you trust, you’re doing fine; the T-bill is a tie-breaker worth about $100 a year per $50,000 in a mid-tax state. If it earns far less, or you’d like a rate locked in before the Fed meets Sept. 16, a six-month T-bill is one of the simplest, safest ways to do both — and your state gets none of it.

This is information, not financial or tax advice. Rates are as of the dates shown and change often. Talk to a licensed professional about your own situation.

Want the plain-English version of every rate move, in your inbox once a week? Join the free Senior Savers newsletter.