Treasury Bills vs. Bank CDs: The Tax Math Most People Miss
T-bills can quietly beat CDs after taxes — especially if you live in a high-tax state.
The hidden edge of Treasury bills
T-bills are short-term U.S. government debt with maturities of 4, 8, 13, 17, 26, or 52 weeks. Their interest is fully exempt from state and local income taxes. CD interest is not. In a state like California (top rate 13.3%), New York City (combined ~14%), or Oregon (9.9%), that exemption is worth a lot more than the headline yield difference suggests.
A real after-tax example
Say you live in California and you're choosing between:
- A 12-month CD at 5.40% APY — taxed federally and at 9.3% state.
- A 52-week T-bill at 5.20% — taxed federally only.
On $50,000:
| Account | Pre-tax interest | State tax owed | After-tax |
|---|---|---|---|
| CD @ 5.40% | $2,700 | $251 | $2,449 |
| T-bill @ 5.20% | $2,600 | $0 | $2,600 |
The T-bill wins by $151 despite a lower headline rate. In a no-income-tax state (Florida, Texas, Tennessee, Nevada), the CD's higher rate wins straight up. The right answer depends entirely on your state.
How to actually buy T-bills
Two paths:
- TreasuryDirect.gov — the government's free website. Open an account once (10 minutes), then bid in weekly auctions at zero commission. Funds settle from a linked bank account.
- Your brokerage (Fidelity, Schwab, Vanguard, Merrill) — usually commission-free for new-issue auctions. Easier interface, integrates with the rest of your accounts, easy to sell early on the secondary market.
Most retirees prefer the brokerage route because 1099s arrive in one place and rollovers are automatic if you set them.
Liquidity: T-bills are surprisingly flexible
You can sell a T-bill before maturity on the secondary market, usually at a tiny spread. There's no early-withdrawal penalty like a CD. The price moves slightly with rates — but on a 4- or 8-week bill, the swing is trivial.
What about Treasury notes and bonds?
- Notes mature in 2–10 years. Same state-tax exemption.
- Bonds mature in 20–30 years. Same exemption, but big price swings with interest rates.
For a cash-equivalent bucket, stick to bills. For a bond allocation, notes can play a role — but that's a portfolio question, not a savings question.
Treasury money market funds: the lazy version
If running auctions feels like work, a Treasury-only money market fund like Vanguard VUSXX, Fidelity FDLXX, or Schwab SNOXX holds T-bills on your behalf, pays nearly the same yield, and gives you daily liquidity. Most of the interest still qualifies for state-tax exemption (check each fund's annual breakdown).
TIPS for inflation protection
For longer-term savings (5+ years), Treasury Inflation-Protected Securities (TIPS) are worth a look. The principal adjusts upward with CPI, and you receive a small fixed coupon on top. In high-inflation periods (2021–2023), TIPS dramatically outperformed traditional Treasuries. Current 5-year TIPS yield about 2.0–2.2% above inflation — guaranteed by the US government. Available through TreasuryDirect or any brokerage. I Bonds (savings bonds) are the retail-friendly cousin: rates reset every 6 months based on CPI, $10,000 annual purchase limit, redeemable after 1 year (forfeit 3 months' interest if redeemed before 5 years).
Bottom line
If you live in a state with income tax and you're parking cash for 3–12 months, run the after-tax math before defaulting to a CD. T-bills frequently win — sometimes by hundreds of dollars per year on the same balance.