T-Bills vs. CDs: Which Safe Investment Pays More?

When protecting cash, the headline interest rate is deceptive. A Certificate of Deposit (CD) might offer 5.0%, while a Treasury Bill (T-Bill) offers 4.8%. However, after taxes, the lower-yielding T-Bill often puts more cash in your pocket. This is due to the State Tax Exemption on Treasuries. Here is how to calculate the “Real Yield” and choose the winner for your 2026 portfolio.

BMT Investing Team BMT Investing Team · 📅 Feb 2026 · ⏱️ 6 min read · INVESTING › FIXED INCOME
Tax
$0
State Tax on T-BillsFact
Lock
Penalty
CD Early Exit FeeWarn
Limit
None
No Cap on T-BillsRule

1. The Rule: Tax-Equivalent Yield

Don’t compare apples to oranges. Compare what you keep.

The Calculation
Formula: T-Bill Yield ÷ (1 – State Tax Rate) = Comparable CD Rate.
Scenario: You live in California (13.3% Tax bracket).
T-Bill Rate: 5.0%
Math: 5.0% ÷ (1 – 0.133) = 5.77%
Result: A bank CD must pay at least 5.77% to beat a 5.0% T-Bill.

2. Feature Comparison (Checklist)

Beyond taxes, liquidity is the main differentiator.

Feature Treasury Bills (T-Bills) Bank CDs
Safety Backed by US Gov (The Printing Press). FDIC Insured up to $250k.
Taxes Federal: Yes
State/Local: NO		 Federal: Yes
State/Local: YES
Liquidity High. Sell anytime (market price fluctuates). Low. Locked until maturity (penalty to break).

3. Timeline: The Reinvestment Risk

Short-term bills expire quickly. If rates drop before you reinvest, you lose out.

Investment Duration Risk Profile
3-Month T-Bill Short
Must Reinvest 4x/Year
1-Year CD Medium
Rate Locked for 12 Mos
Rate Cut Impact
T-Bill Yields Drop Immediately
Planning Note
If you expect the Federal Reserve to cut interest rates in 2026, it is generally better to lock in a longer-term CD (e.g., 18 months) now, rather than buying short-term T-Bills that will renew at lower rates.

4. Strategy: The “T-Bill Ladder”

Get liquidity and yield.

  • The Setup: Divide your cash into 4 piles.
  • The Buy: Buy a 4-week, 8-week, 13-week, and 26-week T-Bill simultaneously.
  • The Roll: As each bill matures, reinvest it into a new 26-week bill.
  • The Result: You have cash becoming available every few weeks (high liquidity), but you are earning the higher 6-month rate on most of your money.

5. Warning: “Callable” CDs

Read the fine print on high-yield CDs.

⛔ The Bank’s Option

Some CDs with amazing rates are “Callable.”

  • How it works: If interest rates drop, the bank can force-redeem the CD early. They give you your principal back, but you stop earning interest.
  • The Risk: You lose the high rate exactly when you want to keep it (when rates are falling). Standard T-Bills are never callable.

6. Frequently Asked Questions

Where do I buy T-Bills?
You can buy them directly at TreasuryDirect.gov (clunky interface, hard to sell) or through most brokerages like Fidelity/Schwab (easier, allows selling before maturity).
Is there a limit on T-Bills?
Practically, no. While I-Bonds have a $10k limit, T-Bills have a $10 million limit per auction. For most individuals, it is unlimited.