CDs vs. T-Bills: What's the Better Investment Now? (2024)

FAQs

CDs vs. T-Bills: What's the Better Investment Now? ›

Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

CDs may not be worth it when interest rates are low. In these environments, conservative investors are often better off in other fixed-income securities, like municipal or corporate bonds, Conners says. Rosenstrock also recommends people consider the tax advantages of investing in fixed-income securities over CDs.

Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

People who are already retired – or retiring in the near future – should consider a CD and lock in a rate now. That way they can potentially keep up with or even be ahead of long-term inflation. There's no guarantee that inflation will stay at elevated levels, however. It could increase or decrease in the future.

Differences between investing in CDs and T-bills

The amount you save on taxes will likely result in a higher payout from a T-bill than a CD. Another benefit of T-bills is their liquidity. You can buy and sell them on a secondary market.

The Potential Downside

Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts.

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

However, stocks are much better than CDs for long-term investors who have the time to ride out short-term losses.

Can I lose my money in a CD account? ›

Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.

Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.

The national average rate for one-year CD rates will be at 1.15 percent APY by the end of 2024, McBride forecasts, while predicting top-yielding one-year CDs to pay a significantly higher rate of 4.25 percent APY at that time.

You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.

The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time. While that amount will be different for everyone, you should keep a few things in mind.

Federal bonds or US Treasury bonds are issued by the Federal Reserve System (made up of the central bank and monetary authority of the United States.) Investors favor Treasury bonds during a recession because they're considered to be a safe investment.

If you're in the 13% tax bracket in California, your after-tax yield for those T-bills may be equivalent to a CD earning 6.21%, Lach said. However, T-bills purchased via TreasuryDirect aren't as liquid as cash held in a savings account or a penalty-free CD.

3 Month Treasury Bill Rate is at 5.26%, compared to 5.26% the previous market day and 5.00% last year. This is higher than the long term average of 4.19%. The 3 Month Treasury Bill Rate is the yield received for investing in a government issued treasury security that has a maturity of 3 months.

It's no secret that Warren Buffett, the billionaire CEO of Berkshire Hathaway, loves treasury bills, also known as T-bills. While he could invest Berkshire Hathaway's massive cash hoard of over $100 billion in nearly anything, for the time being, he's sticking with T-bills.