Same 4.20% Yield, $126 More a Year: Savings vs T-Bills vs Munis After Tax
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A 13-week Treasury bill and the top savings accounts both paid about 4.20% in October 2026, but only one of them is free of state income tax. Enter your tax rates and see which one leaves you the most.
Two 4.20% yields that aren’t the same
On October 14, 2026 the 13-week Treasury bill’s coupon-equivalent yield was 4.20%, from the Treasury’s daily bill rates. The same week, Bankrate listed four savings accounts at 4.20% to 4.27% APY. On paper that’s a tie.
It stops being one once tax comes out. Savings interest is taxed by the IRS and by your state. Treasury interest is taxed by the IRS only: under 31 U.S.C. § 3124 states can’t tax interest on federal obligations. Municipal bond interest goes the other way, free of federal tax under IRC § 103 and usually taxed by every state except the one that issued it.
We ran $50,000 through the calculator at the October yields above and Vanguard’s Municipal Money Market Fund at its 2.66% 7-day SEC yield (as of October 13, 2026), a national fund that’s mostly out-of-state for any one buyer:
| Federal / state rate | Savings at 4.20% | T-bill at 4.20% | Muni at 2.66% | Keeps the most |
|---|---|---|---|---|
| 22% / 0% | $1,638 | $1,638 | $1,330 | Tie: savings or bill |
| 24% / 6% (the defaults) | $1,470 | $1,596 | $1,250 | Bill, +$126 a year |
| 32% / 9.3% + NIIT | $1,153 | $1,348 | $1,206 | Bill, +$195 |
| 32% / 9.3% + NIIT, in-state muni | $1,153 | $1,348 | $1,330 | Bill, +$195 |
| 37% / 13.3% + NIIT, in-state muni | $964 | $1,243 | $1,330 | Muni, +$366 |
In a state with no income tax the bill has no edge, so a savings account paying even slightly more wins. Everywhere else the bill pulls ahead at equal yields, and the gap grows with the state rate. The muni only came out on top in the last row: the top federal bracket, a 13.3% state rate (California’s top rate including its 1% surcharge, per the Tax Foundation), and bonds from your own state. Below that, its 2.66% is simply too low, even tax-free.
The bigger gap is the one most people actually have. Bankrate puts the national average savings rate at 0.65%. On $50,000 at the default tax rates that’s $228 a year after tax, against $1,596 in a bill.
How the math works
Each option keeps its yield minus the taxes that apply to it:
- Savings / CD:
yield × (1 − federal − state − NIIT) - Treasury bill:
yield × (1 − federal − NIIT) - Municipal bond:
yield × (1 − state), or the full yield for bonds from your own state
The tax-equivalent yield grosses each after-tax yield back up at the full rate, after-tax yield ÷ (1 − federal − state − NIIT): the rate a savings account would have to pay to match. The breakeven figures solve the same equation the other way. At the defaults a bill beats a 4.20% savings account at any yield above 3.87%, and the muni would need 3.40% to tie the bill.
The 3.8% net investment income tax applies to taxable interest, Treasury interest included, once modified AGI passes $200,000 single or $250,000 married filing jointly. Tax-exempt muni interest isn’t part of it. The NIIT calculator works out whether you’re over the line.
Where this doesn’t apply
- Treasury money market funds. The state exemption passes through a fund only for the share of income from U.S. obligations, and California, New York and Connecticut allow none of it unless the fund holds at least half its assets in them at each quarter-end. Treasury-only funds pass; many government funds that also hold repurchase agreements don’t. Check your fund’s year-end U.S. government income percentage: Fidelity’s Government Money Market Fund missed the test for 2025, which on $50,000 in California costs $172 a year against its Treasury Only fund.
- You itemize and pay state tax under the SALT cap. State tax on interest is then partly deductible on your federal return, which narrows the bill’s advantage a little. The calculator ignores that deduction.
- Bills sold before maturity. A gain or loss from selling early is taxed differently from the interest, and state tax applies to the gain. The comparison assumes you hold each bill to maturity.
- Rates move. Savings rates are variable, bills reprice every few weeks, and a 52-week bill or CD locks a rate in. A one-year comparison at today’s yields is a snapshot, not a forecast.
- Private-activity munis and AMT. Interest from some private-activity munis counts toward the alternative minimum tax. A fund’s year-end tax information shows how much of its income does.
What to actually do
- Look up your federal bracket and your state’s marginal rate, not the average rate you paid last year.
- Enter your bank’s current APY and the latest 4-, 13- or 26-week bill yield from TreasuryDirect or your broker.
- If you live in a state with income tax and your savings rate is close to the bill rate, bills (bought directly or through a broker) usually keep more.
- Only look at munis if you’re in a high federal bracket, and compare an in-state fund rather than a national one.
- Keep the part you might need tomorrow in savings. Selling a bill before it matures means taking the market price and waiting for settlement, which matters for an emergency fund.