The portrait of Harriet Tubman, the late abolitionist born into slavery in the 1800s, will replace the countenance of the US' seventh president, Andrew Jackson, on the $20 bill.
Tubman, known as the leader of the Underground Railroad - a network of anti-slavery activists - will become the first African American on US paper money and the first woman to be depicted on the country's currency in 100 years.
The portrait of Jackson, who was a slave owner, will be pushed to the back of the currency.
The move is one of numerous changes announced by Treasury Secretary Jacob Lew on Wednesday.
The $5 bill will also undergo a face-lift: The illustration of the Lincoln Memorial on the back will be redesigned to honour "events at the Lincoln Memorial that helped to shape our history and our democracy", Lew said.
The new image on the $5 bill will include numerous new figures, including civil rights leader Martin Luther King Jr, who gave his famous "I have a dream" speech on the steps of the memorial in 1963.
US set to unveil new hundred-dollar bill
On the $10 bill, the Treasury building on the back will be changed to commemorate a 1913 march that ended on the steps of the building. It will also feature suffragette leaders Lucretia Mott, Sojourner Truth, Susan B. Anthony, Elizabeth Cady Stanton and Alice Paul.
The US dollar, the world's most widely accepted currency, has undergone upgrades over the years to stay ahead of counterfeiters.
But the updates proposed by Lew for the three bills will be the most sweeping changes since 1929, when all US paper money was redesigned to feature more standard designs and a smaller size to save printing costs.
'Small but meaningful vindication'
Tubman, who was born into slavery in the early part of the 19th century, escaped and then used the network of anti-slavery activists and safe houses known as the Underground Railroad to transport other slaves to freedom.
After the Civil War, Tubman, who died in 1913, became active in the campaign for women's suffrage.
Numerous groups have been campaigning to have a woman honoured on the nation's paper currency, which has been an all-male domain for more than a century.
Amrita Myers, a historian at Indiana University, said honouring Tubman was appropriate.
"Not only is this going to be the first African American historical figure on US currency, but it's a woman specifically from the era of slavery," Myers said.
Wednesday's announcement helped mark a decades-long decline in the reputation of Jackson, once a pillar of the modern Democratic Party but now often defined by his ownership of slaves and the "Trail of Tears" saga that forcibly removed American Indians from their land.
Cherokee Nation Principal Chief Bill John Baker said in a statement that the currency move was a "small but meaningful vindication" for Native Americans.
The last woman featured on US paper money was Martha Washington, the wife of the first president of the US, George Washington. She was on a dollar silver certificate from 1891 to 1896.
The only other woman ever featured on US paper money was Pocahontas, from 1865 to 1869.