CD vs. Treasury bills
State and local income tax does not touch T-bill interest. In a high-tax state that exemption is frequently worth more than the gap in rates.
| Certificate of deposit | Treasury bill | |
|---|---|---|
| Backing | FDIC / NCUA insured up to $250k | Full faith and credit of the U.S., with no cap |
| State income tax | Fully taxable | Exempt |
| Early exit | A penalty in months of interest | Sell at market price — could be more or less |
| Minimum | Often $500 – $1,000 | $100 at TreasuryDirect |
| Where to buy | Any bank or credit union | TreasuryDirect or a brokerage |
| Best for | No-state-tax states, simple setups | High-tax states, large balances |
The after-tax math, worked through
Consider $50,000 for one year, a 4.40% CD against a 4.15% T-bill, held by a saver in the 24% federal bracket in a 6% state. The CD earns $2,200 before tax; federal and state between them take 30%, leaving $1,540. The T-bill earns $2,075, but the state cannot reach it, and federal tax alone leaves $1,577. The “worse” rate wins by $37. Raise the state rate to 9% — California, New Jersey territory — and the Treasury’s edge widens to roughly $100 on the same money. Take state tax to zero and the CD wins by exactly its headline advantage.
The break-even is mechanical: to tie the CD, a T-bill has to yield at least APY × (1 − fed − state) ÷ (1 − fed). On 24/6 brackets, any Treasury above 4.05% beats a 4.40% CD. Memorize the formula or let the calculator handle it — either way, never compare the two headline rates directly in a state that taxes income.
Safety: both excellent, shaped differently
FDIC insurance covers your CD up to $250,000 per institution per ownership category, backed by a decades-long record of insured depositors losing nothing. Treasuries carry the full faith and credit of the United States with no dollar cap whatsoever — which is why institutions, and anyone placing more than $250,000 in one spot, default to them. On a five-figure deposit the safety difference is academic. On a half-million-dollar deposit it is the entire argument: a single T-bill purchase against the administrative work of splitting CDs across three banks.
The mechanics differ as well. T-bills under a year pay by discount — in this example you buy at about $9,600 and receive $10,000 — and TreasuryDirect's minimum is $100. CDs credit interest as they go and start at around $500. Neither is harder than opening a savings account, though TreasuryDirect’s interface is famously dated, and buying through a brokerage is the usual workaround.
Exiting early: known cost against market price
Break a CD and the cost is printed in your disclosure — three months of interest, say, about $550 in this example. Sell a T-bill early and you take the market price, which turns on where rates have gone since you bought: if rates fell you may exit at a small profit, and if they rose you take a haircut with no stated ceiling. One is an insurance policy with a fixed premium; the other is an open position. Savers who might genuinely need the money mid-term should give the CD’s predictability more weight than any after-tax spread under about a quarter point.