HYSA vs. CD vs. Treasury Bills: Where Should Your Cash Sit?
When you have $20,000 sitting in a checking account earning 0.05%, three options compete for that money in the US market: a high-yield savings account, a CD, and Treasury bills. They look similar — all near-cash, all very safe — but the tax treatment, liquidity, and FDIC/Treasury backing differ in ways that matter for after-tax yield.
High-yield savings accounts: maximum flexibility
HYSAs from online banks like Marcus, Ally, and Discover have paid 4.0%–5.0% APY through 2024–2025, tracking the Federal Funds rate (per FRED data). Money is FDIC-insured up to $250,000 per depositor per bank, and you can pull it out any business day with no penalty.
The trade-off is that HYSA rates are variable. When the Fed cuts rates, your APY drops within weeks. If you've been getting 4.5% and the Fed cuts 0.5%, expect your HYSA to follow within a month. For an emergency fund — where access matters more than locking in yield — that volatility is acceptable.
CDs: lock in today's rate
Certificates of deposit from FDIC-insured banks lock your principal at a fixed rate for 6 months to 5 years. In a falling-rate environment (like late 2024 onward), buying a 1-year CD at 4.75% protects you from HYSA cuts. You sacrifice liquidity in exchange for rate certainty.
Early withdrawal penalties are typically 90 days of interest on shorter CDs, 6 months on longer ones. CD ladders (laddering 1-year, 2-year, and 3-year CDs so one matures every year) give you reinvestment flexibility without giving up the rate lock entirely.
Treasury bills: state-tax-free, backed by the US government
T-Bills (4-week, 8-week, 13-week, 26-week, 52-week) bought through TreasuryDirect or a brokerage trade close to the federal funds rate. Their secret weapon: interest is exempt from state and local income tax. If you live in California (13.3% top rate) or New York City, that's effectively a 1%+ yield bonus.
T-Bills are backed by the full faith and credit of the US government, so default risk is even lower than FDIC insurance theoretically (FDIC has $128B in reserves against $10T+ of insured deposits). Liquidity is excellent — you can sell on the secondary market any business day, though prices may move slightly.
Frequently asked questions
Which is best for an emergency fund?
HYSA, almost always. You need same-day access, FDIC insurance, and a competitive (if variable) rate. Don't tie up emergency money in CDs or T-Bills longer than 4 weeks.
How does the SALT advantage of T-Bills actually work?
T-Bill interest is reported on Form 1099-INT but excluded from state taxable income on your state return (Schedule CA in California, IT-225 in New York, etc.). Your federal taxable income is unchanged. For a Californian in the top bracket, a 4.5% T-Bill is roughly equivalent to a 5.2% HYSA after state tax.
Are Treasury Money Market Funds (TMM) the same?
Close but not identical. Treasury MMFs hold T-Bills and pass through the state tax exemption on the Treasury portion (typically 50–95% of the fund). Read the fund's annual tax disclosure for the exact percentage.