CD’s vs. Treasury Bills

dollar bill with the word Treasury on it

Today, we are going to look at a comparison of Treasury bills vs. Certificates of Deposit (CD’s for short). Each of these has pros and cons. Hopefully, after you are done with this article, you’ll be better equipped to decide which one meets your own investment goals. Which one you choose will depend on a number of factors-when you’ll need the money, how much risk you want to take, and even your state taxes. Both are considered safer investments versus equities.


CD’s versus Treasury Bills

CD’sTreasury Bills
Minimum ValueUsually $1000 for most banks/credit unions.
However, some with no minimum
$100; in $100 increments
Insured?Up to 250K insured by the FDICSecured by the backing of the Federal Government; essentially risk-free
Auto-renewAuto-renews, unless redeemedPossible to auto-reinvest a certain amount of times via
Treasury Direct.
Early WithdrawalPenalty for early withdrawal.
A 12 month CD typically charges a 3 month interest penalty for early withdrawal.
No penalty CD’s are available for reduced rates.
Can sell on the open market. However,
you may get less than you paid depending on the current interest rates.
Simple or Compounded InterestCompounded interest. Most are compounded monthlySimple “interest”
Durations available6 month, 12 month, and many years4 week, 2 month up to 1 year. Typically a greater variety of durations are available for T-bills. Once you get past the one year mark, you move up to T notes and bonds.
comparing Treasury bills to CD’s

Advantages of CDs

  • You know the EXACT rate you are getting
  • Can purchase at a physical bank that you have a history of doing business with
  • Auto renewal (could be a disadvantage?)
  • Federally Insured

One thing a CD has over a treasury bill is that you’ll know the exact rate you are getting before you purchase the CD. With a T-bill, they are sold at auction. If you purchase a T-bill via Treasury Direct, you won’t know the exact rate until after your purchase.

Another thing that sometimes comes into play is some people like knowing their is a physical branch/business behind a product or service. If you have a bank or credit union you like, you can purchase one through them in person. I know as we move into the new & modern age, some consumers are less apprehensive about using online banking, but not everyone is there yet.

Auto-renewal: Depends on how you look at it. This could be an advantage or disadvantage. I once had a CD I forgot was going to mature (even after the bank mailed me a notice). To make a long-story short, it auto-renewed into another year, DOH! At the same time, maybe this is money you won’t need for many many years. Auto-renewing is a beautiful thing in that case, less management and worries. PLEASE NOTE: The only thing you do have to watch out for with a CD is some banks are sneaky. After a certain period, if your CD auto-renews, make sure it auto-renews at the same rate! Some pull you in with a high rate, but then change it after the first 6 months.

Lastly, CD’s are Federally insured up to 250K. They are one of the safest investment devices you can use. If you are rolling in the dough and need a CD for more than 250K, then you’ll have to break it up into more than one CD to stay Federally insured.

Advantages of Treasury Bills

  • Currently higher interest rates (not always the case)
  • No state taxes
  • Backed by the full faith of the Government; Secured & risk-free
  • A variety of durations are available
  • Highly Liquid

This is not always the case; however, T-bills are currently paying better rates than CD’s. If you are looking to make the most of your money, a T-bill is the way to go.

You pay no state taxes on T-bills. (No, I’m not an certified accountant). If you live in a state with high taxes, the advantages of a T-bill over a CD are even more.

Treasury bills are government securities and the most risk-free investment you can make. If one day something horrible happens and you can’t get your money back from a Treasury bill, it will be when we are in complete economic collapse and at that point, it will be the least of your problems.

One of the things I like about T-bills over CD’s is that a greater variety of durations are available. You can time T-bills for whatever purchase or need you have. They now even have a 17 week T-bill 🙂

Lastly, one of the advantages of T-bills is they are highly liquid. If you need to sell before maturity date, you can. Simply move it to the brokerage of your choice (if it isn’t there) and sell on the open market. The catch is you may get LESS back than you paid. Depends on the going interest rates.

An example of CD versus T-bills

As of this article, Capital One is offering a one year CD at a rate of 3.25%. There is no minimum amount. The penalty for early withdrawal is three months worth of interest payments.

The current rate for a one month T-bill is 4.436%

Let’s compare an investment of $5000 in each of these.

The CD:

$5000 would throw off $162.50 without compound interest. Applying monthly compounding and we get $164.94.

By the way, you can use this nifty online calculator to make these calculations.

The T-bill

$5000 would throw off $221.80 a year later.

You are already ahead of the game with a T-bill. However, don’t forget TAXES. Let’s assume your state tax is 6%.

That costs the CD $9.90 in profit, so your actual after-tax profit is $155.04.

You come out ahead with the T-bill by $66.76 (approx 1.34% higher on your initial investment). If you tried to just use the stated interest rates, you’d think your return was only going to be 1.19% higher on the T-bill. Taking taxes into account yields you even more after-tax return.

Closing Words

Please keep in mind, T-bills don’t always pay more than CD’s. It is the case at the time of this article. This is largely due to the fact that banks are currently lush with cash and deposits. They don’t need customers money as much, so the rates offered aren’t as lucrative. Keep an eye on the rates as perhaps the FED pivots and these things change.

In closing, make sure to do an after-tax calculation on the two investments to help decide which one works best for you.


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