T-bills: the boring cash upgrade states can't tax

By Tom, CPA · Updated October 25, 2026

TL;DR: Treasury bills are short-term US government debt maturing in 4 to 52 weeks. You buy at a discount and get face value at maturity, and the difference is interest. That interest is federally taxable but exempt from state and local income tax. For early retirees holding a year or two of spending in cash, T-bills (directly or via a Treasury money market fund) can beat a bank account after state tax, with no default risk.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Every FIRE plan has a cash pile: the emergency fund, next year's spending, the house down payment, the "don't sell stocks in a crash" reserve. Lavish Larry keeps his in a checking account earning roughly nothing, because moving it is "a whole thing." Frugal Fran keeps hers in T-bills, which pay market rates and skip state income tax. Over a decade, the difference can buy a lot of tacos.

T-bills fit the short end of an early retirement allocation and the first rungs of a bond tent.

CPA Warning Label: Yields change with every auction. Compare after-tax yields, including your state's rules, before choosing between T-bills, money market funds, CDs and high-yield savings.

How T-bills work

According to TreasuryDirect:

• Bills mature in 4, 6, 8, 13, 17, 26 and 52 weeks. Cash management bills with variable terms are also sold occasionally, but only through banks and brokers.
• They're sold at a discount or at par. At maturity you receive the face value. The "interest" is the difference between what you paid and the face value.
• The minimum purchase is $100, in $100 increments. Non-competitive bids can go up to $10 million.
• Most terms are auctioned weekly, and 52-week bills every four weeks.

A quick pricing example: if you pay $9,880 for a 26-week bill with a $10,000 face value, you earn $120 of interest when it matures, roughly 1.2% for half a year. Exact quoted yields use specific conventions (discount rate vs investment rate). TreasuryDirect publishes both in auction results, and the investment rate is the one to compare with savings accounts and CDs.

Because they're backed by the US government and mature quickly, T-bills have essentially no credit risk and very little interest rate risk. If rates jump, your 13-week bill matures soon and you reinvest at the new rate. Their main risk is reinvestment risk: when rates fall, so does your income.

T-bills aren't a long-term investment. From 1928 through 2025, 3-month T-bills compounded at about 3.4% a year in the NYU Stern (Damodaran) dataset, versus about 3.0% CPI inflation (BLS): a thin real return. That makes them a place to park money you'll spend soon, not the engine of a 50-year retirement. Think of them as the bucket that lets your stocks stay invested through a downturn, not a replacement for those stocks.

State tax exemption

IRS Publication 550: interest from Treasury bills, notes and bonds is subject to federal income tax but exempt from all state and local income taxes. You'll receive a Form 1099-INT showing Treasury interest in box 3. The IRS generally treats bill interest as income in the year the bill matures.

Tax-equivalent yield: to compare a T-bill with a fully taxable bank account or CD, divide the T-bill yield by (1 - your state tax rate), since federal tax applies to both. For example, a 4.0% T-bill for someone in a 6% state bracket is equivalent to about 4.26% fully taxable (4.0 ÷ 0.94). In a state with no income tax, there's no advantage, and you should just compare headline yields.

For a Treasury money market fund, the state-exempt share depends on how much of its income came from US government obligations. Some states have minimum-percentage rules. Check your fund's year-end tax supplement and your state's instructions.

Broker vs TreasuryDirect

For most investors, a brokerage account is simpler: you can sell before maturity if you need cash, hold bills in IRAs, and see everything in one place. TreasuryDirect is the government's own platform and works fine for buy-and-hold. It's also where you buy I bonds, which brokers don't sell. Whichever you use, set up the linked bank account and test a small purchase before you need the money for something important.

Ladders

A T-bill ladder staggers maturities so cash comes due on a regular schedule. Common setups:

• Rolling 13-week ladder: split cash into three parts and buy 4-, 8- and 13-week bills at once, so something matures every month. Then roll each maturing bill into a new 13-week bill. After the first cycle, you hold only 13-week bills, one maturing each month.
• 52-week ladder for next year's spending: buy bills maturing each quarter over the next year, timed to your quarterly withdrawals and estimated tax payments.
• Auto-roll: buy one term and tell the broker to reinvest at maturity. This is the simplest option, but all your cash rolls at once.

Ladders smooth out reinvestment risk and give you known dates when cash is available, which is handy for quarterly estimated tax payments (mid-April, June, September and January) and big planned expenses. If you need money early, you can sell a bill through a broker at the market price, which is usually close to what you paid for short bills.

Simpler alternative: a Treasury-only money market fund gives similar yields and state-tax treatment with daily liquidity and no ladder maintenance, for a small expense ratio. Many FIRE retirees use one for the next six months of spending and bills for the rest.

Example

Illustration: Fran retires with $100,000 of cash: about 18 months of spending. She lives in a state with a 6% income tax and is in the 12% federal bracket.

• Option A: a high-yield savings account at 4.0%. Interest is $4,000, federal tax $480, state tax $240, leaving $3,280.
• Option B: T-bills at 4.0%. Interest is $4,000, federal tax $480, state tax $0, leaving $3,520.
• The T-bill advantage is $240 a year on $100,000 at these assumed rates. That's not life-changing, but it's free, and it scales with the size of your cash pile and your state's tax rate.

She keeps $20,000 in a Treasury money market fund for flexibility and ladders the rest into bills maturing each quarter, timed with her withdrawal calendar. Larry's $100,000 sits in checking at 0.01%. Over five years he's given up roughly $17,500 of after-tax interest versus Fran, at these rates. He calls it "liquidity." Fran calls it a donation. To be fair, Larry's checking account does have one advantage: instant transfers. Fran solved that by keeping one month of spending in checking and everything else where it earns its keep.

The rates above are illustrations, not quotes. Look up current results on TreasuryDirect before deciding. Next: TIPS ladders for longer-term inflation protection, target-date funds, dividend investing myths, and the stock side in index fund investing for FIRE. If you keep cash reserves for rentals, see rentals for FIRE.