Treasury Bills vs CDs: Which Pays More After Tax?

Which of these are you?

• You live in a state with no income tax. The exemption is worth nothing to you. Take whichever yield is higher, and let the CD's rate, the term, and the early withdrawal terms decide.
• You pay a state rate above the break-even. This chapter shows how to compute that number. Above it, the bill wins on after-tax yield, and it also carries no deposit-insurance cap.
• You might need the money before maturity. A bill can be sold at market price, while a CD charges a penalty set by the bank. A bill's sale price can be below what you paid if rates rose. That is a different risk from a penalty, and both are covered below.
• You hold more than $250,000 in cash. A Treasury bill sidesteps the per-bank insurance limit entirely. Chapter 4 covers the other ways to get above that limit.

What a Treasury bill actually is

A Treasury bill is a short-term U.S. government security sold at a discount to face value. You pay less than $10,000, and at maturity you receive $10,000. The difference is your interest. TreasuryDirect lists the terms as 4, 6, 8, 13, 17, 26 and 52 weeks, with a $100 minimum purchase.

A bill is not a deposit. The FDIC lists Treasury bills, notes and bonds among the products it does not insure, and notes that they are backed by the full faith and credit of the U.S. government. So the two products protect you differently. The CD has a $250,000 ceiling per depositor, per bank, per ownership category, and inside that ceiling it is insured. The bill has no ceiling and no insurance, because the obligor is the federal government itself.

A bill pays no periodic interest, so there is nothing to reinvest mid-term and no monthly deposit. Also, a cash-basis taxpayer reports bill interest at maturity, according to IRS Publication 550, so a bill bought in November and maturing the next August puts all of its interest on the following year's return. A CD credits interest on its own schedule and reports it annually. Chapter 3 covers the CD side of that timing question.

Discount rate versus investment rate

The discount rate is a quoting convention, not the return on your money. TreasuryDirect gives the price formula: Price = Face value x (1 - discount rate x days / 360). Because the discount rate is applied to face value rather than to the smaller amount you paid, and because it uses a 360-day year, it understates the yield.

The yield that is comparable to a CD is the investment rate, which TreasuryDirect's glossary defines as an annualized simple interest rate on a 365-day year (366 in a leap year), without compounding. The formula in 31 CFR Part 356, Appendix B, for a bill with no more than half a year to maturity is:

i = [(100 - P) / P] x [y / r], where P is the price per $100 of face value, r is the days to maturity, and y is the days in the year (365, or 366 if the year includes February 29).

For a bill longer than half a year, the appendix uses a quadratic: P x [1 + (r - y/2)(i/y)] x (1 + i/2) = 100. Solving it gives i = [-b + sqrt(b^2 - 4ac)] / 2a, with a = r/(2y) - 0.25, b = r/y and c = (P - 100)/P.

Here is the 26-week case with a hypothetical 4.00% discount rate on $10,000 of face value. All figures in this section are hypothetical inputs, not current auction results.

The bill quoted at 4.00% earns 4.14% on the cash you put in. Rolling it over compounds that to 4.18% a year, which is the figure that lines up with a CD's APY. A CD's APY already includes compounding, so an apples-to-apples comparison uses effective annual yield on the bill side.

The gap between the quoted discount rate and the effective annual yield widens with the term, because a longer bill is bought at a larger discount:

Every row uses the same hypothetical 4.00% discount rate. The 52-week row uses the quadratic form, because 364 days is more than half of 365. That row is where the 4.23% in the worked example below comes from.

The state tax exemption and the break-even rate

Interest on U.S. obligations is exempt from state and local income tax under 31 U.S.C. § 3124(a). The statute reads that stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State, and it excepts a nondiscriminatory corporate franchise tax and estate or inheritance taxes. Federal income tax applies to bill interest in full. IRS Publication 550 gives the same treatment.

The comparison therefore reduces to one layer. Both products face the same federal tax, so the only difference is the state layer. Two formulas do the work:

• After-state-tax yield of a bank product = bank yield x (1 - state rate)
• Break-even state rate = 1 - (bill yield / bank yield)

Above the break-even rate, the bill wins. Below it, the CD wins.

The example uses a 9.3% state rate, which is the California rate for a single filer with taxable income from $72,724 to $371,479 in the Franchise Tax Board's 2025 Schedule X. Three lines follow from it:

• After-state-tax CD yield: 4.50% x (1 - 0.093) = 4.08%.
• Break-even state rate: 1 - (4.23 / 4.50) = 6.0%.
• Dollars on $50,000 for one year: the CD nets $2,040.75 after state tax, the bill $2,115.00, a difference of $74.25 for the bill.

Different states land on different sides of the same 6.0% line. Each rate below comes from the state's own revenue department; the bracket is stated because your marginal rate is set by your own taxable income, not by the state name.

The table assumes a CD at 4.50% APY and a 52-week bill at 4.23% effective annual yield, both hypothetical. If your CD is at 4.35%, the break-even rate falls to 2.8%. If the bill's yield is 4.00%, the break-even rises to 11.1%. The break-even formula re-runs on any pair of yields, and the calculator below does it for you.

Chapter 15 goes deeper on this: where the top state rates actually start, the federal deduction for state tax paid, and the limits on Treasury money market funds.

Auctions, the secondary market, and where to buy

Bills reach the public through auctions. TreasuryDirect states that 4, 6, 8, 13, 17 and 26 week bills are auctioned weekly, and 52-week bills every four weeks. At an auction you place one of two kinds of bid:

• A noncompetitive bid agrees to accept the rate the auction sets. TreasuryDirect allows up to $10 million per auction. This is the normal choice for individuals, because you are guaranteed to receive the bill.
• A competitive bid names the discount rate you will accept. It can be rejected if you bid too low a rate, and a single competitive bidder is limited to 35% of the offering.

The other way to buy is a bank, broker or dealer, which is how you reach the secondary market. A bill bought from another investor trades at a market yield rather than an auction rate, and the price moves as rates move. Selling early therefore carries price risk, though on a bill with weeks left it is small, because the price converges to face value at maturity.

TreasuryDirect versus a brokerage. TreasuryDirect is the Treasury's own platform, with no dealer between you and the auction. It offers a $100 minimum and lets you schedule a bill to reinvest at maturity instead of taking the principal. The trade-off is at the exit. TreasuryDirect's own FAQ says that to sell before maturity you transfer the security to an account in the commercial book-entry system, and adds that a broker or institution normally charges a fee for that service. There is also a waiting period: a security bought in TreasuryDirect must be held there for 45 days before it can be sold or transferred, so a 4-week bill cannot be sold from TreasuryDirect at all. A brokerage account holds bills in the commercial system from the start, so a sale is a trade, not a transfer. If you expect to sell before maturity, that argues for a broker. If you plan to hold every bill to maturity, TreasuryDirect puts no dealer between you and the auction. The longer comparison is in TreasuryDirect vs brokerage for Treasury bills.

Cash Management Bills, which the Treasury issues for short-term funding needs, are sold only through banks, brokers and dealers, and never at TreasuryDirect.

Liquidity: penalty versus market price

A CD's early withdrawal cost is a contract term: the bank sets it, and it varies. A bill's early exit cost is market-determined: you sell at whatever price the secondary market pays, and you may also pay a dealer spread or a fee.

For a bill with a few weeks left, the price moves little. For a 52-week bill sold with 40 weeks to go after rates rose, the price can be below what you paid. Neither product is free to exit. What differs is who sets the cost and whether it can be known in advance. A CD's penalty is disclosed at opening; a bill's sale price is not.

This is why the tier framework from chapter 2 assigns them differently. A bill fits the Reserve and Strategic tiers when you can hold to maturity or accept market price on a sale. Money you may need within days belongs in Tier 1, in an account with same-day access.

When the CD wins

The CD wins in four situations:

• Your state rate is below the break-even. Illinois and Pennsylvania in the table above are the pattern: a flat rate under 6% does not clear a 0.27-point yield gap.
• You are in a state with no income tax. The bill's exemption is worth nothing, and the comparison is raw yield.
• A CD promotion beats the bill by more than the state tax saved. Run the break-even formula against the promotional APY, not the standard one.
• Convenience has a real cost. If opening a bill position means a new brokerage account and a fee for every sale, a CD at the bank you already use may be worth a few basis points.

The bill wins when your state rate is above the break-even, when you hold more than the insurance limit at one bank, or when you want interest deferred to the maturity year.

A ladder of bills

A bill ladder works like a CD ladder: equal amounts in bills of staggered terms, each rolling into a new bill as it matures. Chapter 6 covers CD ladder construction in detail, and the ladder math carries over. Average maturity of a ladder of N equal rungs spaced s months apart is s x (N + 1) / 2 months, so a ladder of four rungs at 3-month spacing averages 7.5 months.

The tool below works from a current annualized rate that you enter, estimates rung size, and shows the schedule. It does not fetch a live yield.

What to do with this

1. Pull the effective annual yield of the bill you would buy. Use the investment rate for bills up to half a year, and the quadratic form for longer ones, or read the broker's yield-to-maturity figure.
2. Take the best comparable CD APY for the same term.
3. Compute 1 - (bill yield / CD yield). That is your break-even state rate.
4. Compare it with your marginal state rate, including any city tax. If yours is higher, the bill wins on after-tax yield.
5. Check the exit. If you may sell early, price the risk of a sale at market price against the CD's penalty.

For reference, the 12-month Treasury yield we track is 4.40%, and the highest CD APY we track across all terms is 5.00%. The two are quoted on different bases and the CD figure is not term-matched, so run the comparison on rates for your actual term. For a Treasury ETF as a cash substitute, see SGOV versus high-yield savings.