Treasury Bills vs. Bank CDs: The Tax Math Most People Miss

The hidden edge of Treasury bills

Treasury bills (T-bills) are short-term U.S. government debt, sold in maturities from 4 weeks to 52 weeks. Their interest is fully exempt from state and local income taxes. CD interest is not.

The math — a real example

Say you live in California (state tax: 9.3%) and you're choosing between:

• A 6-month CD at 5.30% APY
• A 6-month T-bill at 5.20% APY

The CD looks higher. But after California state tax:

• CD effective yield: 5.30% × (1 – 0.093) = 4.81%
• T-bill effective yield: 5.20% (no state tax) = 5.20%

The T-bill quietly wins by 39 basis points. On $50,000, that's $195/year extra — for the same risk level (both backed by the U.S. government, since CDs are FDIC-insured up to $250k).

Where to buy T-bills

• TreasuryDirect.gov — official, but the UI is straight out of 2003.
• Fidelity, Schwab, Vanguard brokerage — easier, no fees on new-issue T-bills.

When CDs still win

• You live in a no-income-tax state (FL, TX, TN, WY, NV, SD, WA, AK, NH).
• You want FDIC insurance instead of Treasury backing (functionally equivalent).
• You want set-it-and-forget-it auto-renewal, which CDs do automatically and T-bills don't.

Bonus: I-Bonds

Series I Savings Bonds adjust with inflation. The current composite rate is around 4.28%, and they're also state-tax-free. The catch: a $10,000/year limit per person and you must hold for 12 months. Useful as a side bucket, not a primary income tool.

Bottom line

If you're 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 for the math-aware saver — and laddering a few rungs (4-week, 8-week, 13-week) is just as easy as a CD ladder.