High-yield savings accounts and Treasury bills (T-bills) are both good solutions for individuals who want a time-limited and fairly low-risk way to earn interest on their money. However, while the first is a savings account, the latter is a government security. This difference affects the way your money is stored and the control you have over it.
Choosing between these two alternatives may come down to risk tolerance, taxation, or your own financial objectives.
Here, we’ll review the advantages, disadvantages, and nuances of High-yield savings accounts and T-bills to help you decide which makes sense for you and your money.
Treasury bills, or T-bills, are short-term securities issued by the U.S. Treasury. Investors can purchase them directly from the U.S. government using treasurydirect.gov, but it’s often easier to purchase them using a brokerage. It only takes a few steps to set up your Treasury Account with Public and then you’ll be on your way to investing in T-bills and earning a 5.5% interest rate*.
T-bills are purchased at a discounted rate (<$100) from their face value ($100), but are redeemed following their short maturity period for their full face value, allowing the investor to earn interest from the difference between the face value and the discounted purchase amount.
What are High-yield savings accounts (HYSA)?
A traditional savings account keeps your money safe while earning interest at a low rate. High-yield savings accounts offer the same security as a regular savings account but come with a much higher annual rate. That’s because their interest rates are variable rather than fixed-rate, and are closely connected to the interest rates set by the Fed.
High-yield savings accounts have proliferated with the rise of online banks. These institutions typically offer the highest interest rates. While traditional savings accounts usually are opened at the same bank where the investor keeps their checking account, those who want to reap the benefits of a high-yield savings account will likely choose to open one through a separate online savings account at a different firm.
Benefits of T-bills vs. High-Yield Savings Accounts
Treasury bills, much like high-yield savings accounts, are a very low-risk way to earn interest on your cash. At the same time, there are a host of benefits that come with HYSAs, including relatively high interest rates, a low risk level, and full control over your money.
High-Yield Savings Accounts
High interest rates that are fixed for the term of the bill (and are often higher than HYSA rates)
Higher interest rates than standard savings accounts
Low-risk investment backed by the US government and fully insured
Almost entirely risk-free and FDIC insured
Potential tax savings and a low minimum investment
Benefits of T-bills and High-Yield Savings Accounts
Benefits of T-bills
Backed by the US Government
T-bills are backed by the United States government, and as a result, come with a nearly bulletproof guarantee that you’ll get your money back plus interest when the bill matures.
Treasury bills purchased on Public are custodied at Bank of New York Mellon and insured by the Securities Investor Protection Corporation (SIPC) up to $500,000.
Higher Interest Rates
The rates on Treasury bills fluctuate but are always fixed for the term of the bill based on the purchase price. Currently, Public offers access to 26-week Treasury bills at a 5.5% interest rate, which exceeds the rate of a typical High-Yield Savings Account at this time.**
State and Local Tax Exemptions
Like Treasury notes and bonds, T-bills are exempt from state and local taxes — another advantage that lets you keep more of your yield. Investors in states with high income tax rates may especially benefit from this feature.
Low Minimum Investment
T-bills generally require a low minimum investment. With Public, you can purchase T-bills in increments of $100 and access your cash at any time.
Benefits of high-yield savings accounts
Higher Interest Rates
The single biggest benefit of a high-yield savings account is their higher interest rates. The APY for high-yield savings accounts can be as much as twenty times higher than the APY for a traditional savings account. As a result of the higher yield from these accounts, you will likely be able to make a higher return on your initial deposit, even if that deposit is exactly the same. And because these accounts often (though not always) have daily compounding, you are likely to earn somewhat more than you might with an account where interest compounds less frequently.
Like other bank accounts, these accounts are often FDIC-insured up to $250k or more (if you choose to open this type of account through a credit union rather than a bank, it is still insured by the National Credit Union Association).
Because these accounts are usually available through online banks, they are accompanied by some of the advantages usually linked to online banking, such as frictionless account management and easy withdrawals.
In summary, high-yield savings accounts are a low-risk tool to increase your rate of return and increase the amount of money in your savings compared to checking accounts or other lower yielding options.
Risks of T-bills vs. high-yield savings accounts
Neither T-bills nor high-yield savings accounts are considered high-risk. However, both carry some risks.
High-Yield Savings Accounts
Interest rate risk means future T-bill rates may be different
Interest rate can change at any time
Inflation can affect the ‘real’ value of a T-bill
Potential for withdrawal limits or minimum balance requirements
Risks of T-bills and High-Yield Savings Accounts
Risks Associated with T-bills
Interest Rate Changes
As fixed-income investments, T-bills are subject to interest rate risk. Higher than expected interest rates can lead to a decrease in the value of T-bills, while unexpectedly low interest rates can increase T-bill values. This also means that longer-maturity T-bills have a higher sensitivity to interest rate risk – their prices fluctuate more than shorter term bills. However, you’ll lock in interest rates when you buy your T-bill, so you don’t have to worry about rate or price fluctuations over its term if you hold the T-bill until maturity.
In addition to interest rate risk, inflation risk also applies to T-bills. This means that, when inflation rises, the ‘real’ value of T-bill yields sinks since purchasing power is reduced. As a result, T-bills are a less desirable investment during periods of unexpected, rapidly rising inflation, since investors may find that they have effectively lost more value on the bill as a result of inflation.
Risks of High-Yield Savings Accounts
The rates linked to these accounts tend to be variable, meaning they move depending on economic conditions. For HYSAs, they are usually closely related to the interest rate set by the Federal Reserve. While those rates are usually higher than those of a traditional account, they can fluctuate without warning at any time.
The terms of the individual account may vary, and it’s wise to seek out the best savings account for your goals. Just as with traditional savings accounts, some banks institute withdrawal limits, enforce a minimum balance, or charge fees for various activities.
Interest Rates on T-bills vs. High-Yield Savings Accounts
Interest rates on T-bills and high-yield savings accounts may vary depending on when you buy a T-bill or fund a high-yield savings account. Generally speaking, T-bills are fixed-rate investments, meaning the rate is set when you buy the bill. The rates on High-Yield Savings Accounts change frequently based on the Fed’s benchmark rate and other economic conditions.
High-Yield Savings Accounts
Fixed for the duration of the bill
Can be raised or lowered at any point
Vary based on economic conditions. Unexpectedly high interest rates lower the price of T-bills, while unexpectedly low-interest rates raise the value
The rate is usually based on economic conditions but could also be adjusted as a result of corporate interests
Public offers access to 26 Wk Treasury bills, which have a current rate of 5.5%*
Varies based on provider and economic conditions
Interest Rates on T-bills and High-Yield Savings Accounts
Taxes on T-bills vs. High-Yield Savings Accounts
The tax status of T-bills differs from High-Yield Savings Accounts in several crucial ways. The implications of this can affect your overall returns.
High-Yield Savings Accounts
Subject to federal tax, but not state/local taxes
Subject to federal, state, and local taxes
Usually taxed at the investor’s marginal tax rate
Taxed as standard income tax and included in gross income
Taxes on T-bills and High-Yield Savings Accounts
Taxes on T-bills
Treasury bill taxes differ from taxes on high-yield savings accounts. Government securities, including T-bills, are taxed only on the federal level. They are exempt from state and local taxes. You should consult your legal and/or tax advisors before making any financial decisions.
T-bill investors list their interest earnings from these investments on their federal tax returns, and those earnings are then taxed at the investor’s marginal tax rate, in accordance with their tax bracket. You may also have to pay capital gains if you buy a T-bill at a discount and then earn a profit.
Taxes on High-Yield Savings Accounts
The interest on high-yield savings accounts, just like the interest earned through certificates of deposits, is subject to standard income tax. These earnings are included in your gross income for tax purposes.
Though you will have to pay ordinary income tax on interest earned through one of these accounts, the earnings linked to their high APY will offset this taxation. Your after-tax earnings will be reduced by the taxes that you pay.
Treasury bills and high-yield savings accounts are both excellent options for individuals looking for a short-term place to park some cash while yielding interest. Depending on your circumstances, however, one option may be superior for your financial goals.
Treasury bills can sometimes earn higher yields than High-Yield Savings Accounts, but they also come with interest rate risk as well as inflation risk. High-Yield Savings Accounts are extremely low risk, but their rates can fluctuate, so they don’t guarantee a certain yield the way that Treasury bills do if held until maturity.
The fact that interest yields from T-bills are exempt from state and local taxes can be an advantage for those who live in states with income tax rates, because high-yield savings account yields are taxed like ordinary income. If you live in a state or city with high taxes, Treasury bills may offer a larger advantage for you.
High-yield savings accounts are often used for short-term financial goals: emergency funds, for instance. This is because, as the inflation rate changes, money deposited in a savings account can lose ‘real’ value over the long term.
Your choice between these options may come down to where you live, the level of risk you want to tolerate, and the wider economic circumstances. If you’re curious about how to buy Treasury bills, consider opening a Treasury Account account with Public. It’s a safe and easy way to take advantage of low-risk returns.
Can I withdraw all my money from a high-yield savings account?
Yes, you can withdraw from a high-yield savings account at any time. However, some banks limit the number of withdrawals you can make in a month.
What is the least amount of time you need to keep your money in a high-yield savings account & T-bills?
You can withdraw your money at any time, but you may lose out on potential profits or experience a loss if market values decline.
What is the safest: high-yield savings accounts or T-bills?
Both are considered low-risk places to park your cash and are considered very safe.
Where do you put your cash during a recession?
During periods of economic instability, low-risk cash or cash-alternative accounts that offer high rates are favorable for many investors. While it depends on your risk appetite, T-bills and high-yield savings accounts tend to be safe options.