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Savings Showdown: CDs vs T-Bills

Certificates of Deposit (CDs) and Treasury Bills (T-Bills) are two of the most popular savings vehicles for those looking for a safe and reliable way to grow their savings. Both offer a fixed interest rate over a specified time period. Which one should you choose for your savings? 

To answer this question, we need to compare CDs and T-Bills on four key factors: yield, safety, taxes, and liquidity. Let’s see how they stack up against each other.

Yield:

Highest CDT-BillAverage CD
3 Month5.66%5.50%1.37%
6 Month5.76%5.54%1.36%
1 Year5.80%5.46%1.76%
As of 9/22/23

The highest-yielding CDs currently yield more than comparable T-Bills (based on CD data from Investopedia). However, this is not always the case as the yields fluctuate depending on market conditions. A few months ago the situation was reversed and T-bills yielded more than the highest CD. 

Also, note that the average CD yield is much lower than T-Bills, as many major banks offer very low-interest rates on their CDs (average CD yield data comes from the FDIC). Therefore, to get the best return on your savings with a CD, you need to shop around for the best CD rate available. 

Winner: CDs (as long as someone does the research to get the highest CD, otherwise T-Bills win).

Safety:

US Government Bonds are generally considered the safest asset in the world and the yield on treasury securities is called the risk-free rate in finance. Meanwhile, CDs are covered by FDIC insurance up to $250K, providing them with the same safety afforded to treasury securities. 

However, if you have a CD over FDIC limits, you become an unsecured creditor of the bank or credit union. This means that you have to wait in line with other creditor to get paid back, and there is a possibility that you might lose some or all of your money. That makes CDs over those FDIC limits riskier. Just this year alone we saw many bank failures, reminding investors to always be wary. 

Winner: Under FDIC Limits = Tie

Over FDIC Limits = T- Bills 

Taxes:

Interest on treasury securities is exempt from state and local taxes (although still subject to federal taxes). CDs offer no such tax advantages

Winner: T-Bills (Unless you are exempt from state and local income taxes)

Liquidity:

Treasuries are one of the most liquid assets in the world and can be easily bought/sold. You can sell T-Bills at any time without penalty. 

CDs are less liquid than treasuries, as they have a smaller and less active secondary market. Most CDs include a penalty of lost interest for selling (although that’s not the case for brokered CDs). 

Winner: T-Bills

Who Wins the Savings Showdown?

It depends! For most people, I favor T-Bills over CDs, as they offer a similar yield to the best CDs, greater safety, lower taxes, and higher liquidity than CDs. You can buy T-Bills easily and cheaply through TreasuryDirect.gov, where you can get the same yield as any other investor in the world without paying any fees.

With CDs, we need to read the fine print. Is it callable? What penalty will you pay for taking money before it matures? What is the yield? Are you below the FDIC limit? If not, how comfortable are you with the credit quality of the bank?

However, some people might prefer CDs over T-Bills, if they meet all of the following criteria:

  • They do their research and find a CD with a higher yield than a comparable T-Bill
  • They are sure that they will not need access to their money before the CD matures
  • Their investment is under the FDIC limit
  • They are exempt from state and local income taxes

In that case, CDs might offer a slightly higher net return than T-Bills, with the same level of safety and protection.

Ultimately, the choice between CDs and T-Bills depends on your personal goals, risk tolerance, tax situation, and liquidity needs. You should always compare the pros and cons of each option before making your decision.

Scott Caufield, CFA, CPA