Should I Buy a CD or a Treasury Bill?

Investing involves a range of options, and for those prioritizing stability and a low degree of risk, certain debt instruments stand out. Certificates of Deposit (CDs) and Treasury Bills (T-Bills) are two common choices for individuals seeking to preserve capital and achieve predictable returns. These financial products serve as foundational components in a balanced portfolio, particularly for short-term financial goals.

Understanding Certificates of Deposit

A Certificate of Deposit (CD) is a type of savings account offered by banks and credit unions. It holds a fixed amount of money for a specified period, known as the term, in exchange for a fixed interest rate. This means the interest rate remains constant throughout the term, providing a predictable return.

CDs typically have various maturity dates, ranging from a few months to several years, allowing investors to choose a term that aligns with their financial timeline. A penalty for early withdrawal is a key characteristic. If funds are needed before maturity, investors generally incur a penalty, which can reduce interest earned or even a portion of the principal.

Deposits in CDs are protected by federal insurance. The Federal Deposit Insurance Corporation (FDIC) insures CDs issued by banks, while the National Credit Union Administration (NCUA) covers those from credit unions. This insurance protects up to $250,000 per depositor, per insured institution.

Understanding Treasury Bills

Treasury Bills (T-Bills) are short-term debt obligations issued by the U.S. Department of the Treasury. They are considered among the safest investments available because they are backed by the full faith and credit of the U.S. government, virtually eliminating default risk.

T-Bills do not pay periodic interest. Instead, they are sold at a discount from their face value, and at maturity, the investor receives the full face value. The difference between the discounted purchase price and the face value represents the investor’s return. For example, buying a $1,000 T-Bill for $990 yields $10 in interest at maturity.

T-Bills are typically issued with maturities of four, eight, 13, 17, 26, and 52 weeks. This range provides flexibility for very short-term investment vehicles. The minimum purchase amount for T-Bills is $100.

Key Distinctions Between CDs and Treasury Bills

The choice between Certificates of Deposit and Treasury Bills hinges on several distinct characteristics. CDs originate from banks and credit unions, while T-Bills are direct obligations of the U.S. Department of the Treasury. This influences their backing and perceived risk.

CDs are insured by the FDIC or NCUA up to $250,000 per depositor, per institution. T-Bills are backed by the full faith and credit of the U.S. government. Both are low-risk investments, but their backing differs.

Interest earned on CDs is subject to federal, state, and local income taxes. In contrast, interest from T-Bills is exempt from state and local income taxes, though it remains subject to federal income tax. This tax advantage can make T-Bills appealing for investors in high-tax states.

CDs have limited secondary markets, and early withdrawals often incur penalties, reducing their liquidity. T-Bills possess an active secondary market, allowing investors to sell them before maturity without penalty, offering greater liquidity.

CDs pay a fixed interest rate. T-Bills are zero-coupon bonds, sold at a discount, with the return realized as the difference between purchase price and face value at maturity.

CDs generally range from three months to five years. T-Bills are exclusively short-term instruments, with common maturities of four, eight, 13, 17, 26, and 52 weeks.

Acquiring Certificates of Deposit

Purchasing a Certificate of Deposit is straightforward, primarily available through financial institutions. Individuals can acquire CDs directly from banks and credit unions, either by visiting a branch, through online banking, or by phone. These direct purchases involve selecting a CD term and interest rate offered by the institution.

Alternatively, investors can purchase brokered CDs through brokerage firms. Brokered CDs are issued by various banks but managed through a brokerage account, potentially offering a wider selection of terms and rates. You typically need to fund the CD with a lump sum. The minimum investment for CDs can vary by institution, often starting from $500.

Acquiring Treasury Bills

Obtaining Treasury Bills can be done directly from the U.S. government or through financial intermediaries. The most direct method is through TreasuryDirect.gov, the official online platform of the U.S. Department of the Treasury. To purchase T-Bills directly, you must establish a TreasuryDirect account, which requires a Social Security number or taxpayer identification number, a U.S. address, and a linked checking or savings account for payments.

Once an account is set up, you can participate in regular T-Bill auctions where new securities are issued. You can place a non-competitive bid, which guarantees your order will be filled at the average auction price, or a competitive bid, where you specify the yield you are willing to accept.

Treasury Bills can also be purchased through brokerage firms. Brokerages allow investors to buy newly issued T-Bills in primary auctions or purchase existing T-Bills on the secondary market. While brokerages may have different minimum purchase requirements, often $1,000, they offer convenience and integration with other investment accounts.