Treasury Bills vs. CDs: Where Should You Invest?

Investors looking for low-risk places to park cash often compare short-term options like Treasury bills and certificates of deposit (CDs). Both offer predictable returns and are widely considered safe, but they operate differently. Treasury bills are sold at a discount and mature at face value, while CDs typically pay interest at a fixed rate over a set term. The choice between these two often depends on factors like liquidity needs, interest rate outlook and tax considerations.

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Treasury Bills vs. CDs: What Are They?

Treasury bills and certificates of deposit are both interest-bearing debt instruments, but they originate from different issuers and follow distinct mechanics. Treasury bills, or T-bills, are short-term securities issued by the U.S. Department of the Treasury. They are typically issued with maturities ranging from a few days up to one year, with common terms of 4, 8, 13, 26, and 52 weeks.

T-bills don’t pay interest in the traditional sense. Instead, they’re sold at a discount to face value and, when mature, can be redeemed for full face value. The difference between the purchase price and the maturity value represents the investor’s earnings.

CDs are issued by banks and credit unions and pay a fixed rate of interest over a specified term, typically ranging from a few months to several years. The principal and accrued interest are paid out at maturity. While both products offer low default risk, CDs are backed by Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance up to applicable limits. T-bills, by comparison, are backed by the full faith and credit of the U.S. government.

Treasury Bills vs. CDs: Key Differences

While both T-bills and CDs serve as low-risk savings tools, their underlying characteristics create meaningful differences in how they function. These distinctions can influence not only returns, but also accessibility, taxation and overall fit within a broader investment strategy.

Issuer and Backing

T-bills are issued by the U.S. Treasury and backed by the federal government. This makes them effectively free of default risk. CDs, meanwhile, are issued by banks or credit unions and are protected up to $250,000 (per depositor, per institution, per ownership category) by FDIC or NCUA insurance. While both are low-risk, the backing differs in nature: one is sovereign, while the other is institutional with federal insurance.

Interest Structure

T-bills are issued without coupons, so investors don’t receive interest payments along the way. They are bought below their face value and later redeemed at par, with the discount effectively serving as the return. CDs pay interest at a stated annual percentage yield (APY), typically on a monthly, quarterly or annual basis. This difference affects how and when returns are realized.

Liquidity and Access

T-bills can be sold on the secondary market before maturity, offering some liquidity, especially for short-term bills. Most CDs are less flexible. Redeeming a CD before maturity often triggers early withdrawal penalties, unless it’s a brokered CD that can sometimes be sold. As a result, investors who prioritize access to funds may find T-bills more accommodating.

Tax Treatment

The interest from T-bills is exempt from state and local income taxes, which enhances their appeal for investors in high-tax states. CD interest, by contrast, is fully taxable at the federal, state and local levels. This difference may impact net returns depending on where the investor lives and their overall tax situation.

Purchase Channels

The purchase process also differs. T-bills are bought through TreasuryDirect or brokerage platforms in minimum increments of $100. CDs can be obtained directly from banks or through brokered offerings in almost any amount. Brokered CDs may offer higher yields but could have different terms, including early redemption conditions.

Which Should You Invest in?

Choosing between T-bills and CDs depends on your timeline, income needs and tax situation. In some cases, holding both may make sense.

If you’re saving for a known expense in six months, including a tuition bill or wedding payment, you might lean toward a T-bill that matures shortly before you need the funds. You’ll lock in a return without risking early withdrawal penalties, and the interest won’t be taxed by your state.

On the other hand, if you’re building a predictable income stream and don’t anticipate needing the money, a CD with a fixed interest rate might appeal to you. For example, if you’re saving for a down payment on a house and want to earn steady interest over the next two years without market exposure, a two-year CD from a federally insured bank could provide that stability.

Tax treatment also plays a role. Suppose you live in California and are in a high state income tax bracket. You might find T-bills more attractive than CDs because the interest is exempt from state income tax, potentially increasing your after-tax return. Conversely, if your state has no income tax, CDs may offer a better return.

You can also combine both. Say you want to keep some funds highly liquid but are also looking to earn a bit more yield over a longer horizon. You might buy a four-week T-bill to cover short-term needs and a one-year CD for a portion of your savings you’re comfortable locking in. This blended approach can offer flexibility and diversification within a conservative fixed-income allocation.

Bottom Line

T-bills and CDs offer different trade-offs for conservative savers, each with features that can align with specific goals or constraints. Understanding how they differ in terms of structure, access and tax treatment allows investors to tailor cash management strategies with more precision. Whether used independently or together, they can play distinct roles depending on timing, liquidity preferences and tax considerations.

Income Investing Tips

A financial advisor can help design an income portfolio tailored to your needs, factoring in your risk tolerance, tax situation and retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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