A savings account APY is a floating number. The bank can cut it tomorrow, and when the broader rate environment falls, it will. Certificates of deposit and Treasury bills solve that specific problem: both let you fix a known yield on a known amount for a known stretch of time. They come from different corners of the financial system, a bank vault and the U.S. Treasury's auction room, and the differences in taxes, minimums, and exit rules are worth understanding before you commit cash to either. This article is education about how the instruments work, not a recommendation to buy anything.
How a CD works
A certificate of deposit is a bank deposit with a contract on top. You agree to leave a sum untouched for a fixed term, anywhere from a month to five years or more, and the bank agrees to pay a fixed APY for the duration. Because you have promised not to move the money, banks typically pay more than on ordinary savings, with longer terms usually, but not always, paying more than shorter ones.
CDs at insured banks carry standard FDIC coverage, and share certificates at federally insured credit unions carry the NCUA equivalent, up to the usual $250,000 limits explained in our deposit insurance guide. The Truth in Savings disclosure states the APY, the term, and the penalty before you open the account.
The early withdrawal penalty is the whole contract
Break a CD before maturity and the bank charges a penalty, most often expressed as a number of months of interest: 90 days of interest on short terms and six to twelve months on longer ones are common structures, though each bank sets its own. Withdraw early enough and the penalty can eat into principal, since it can exceed the interest you have earned so far. Two consequences follow. First, read the penalty clause, not just the rate. Second, money with any real chance of being needed mid-term belongs in a liquid account instead; an emergency fund locked in a CD is an emergency fund with a toll gate on it, which is why our piece on emergency fund sizing treats liquidity as non-negotiable.
Variations worth knowing
- No-penalty CDs allow one full withdrawal after a short initial window, in exchange for a somewhat lower rate. They behave like a savings account with a rate floor.
- Brokered CDs are bank CDs bought through a brokerage account. There is no early withdrawal penalty because there is no early withdrawal; instead you can sell the CD on a secondary market, where the price can be above or below what you paid depending on how rates have moved.
- Bump-up and step-up CDs allow a rate adjustment mid-term under defined conditions, again usually priced with a lower starting APY.
How a Treasury bill works
A Treasury bill is short-term debt of the United States government, issued in maturities from four to fifty-two weeks. T-bills do not pay periodic interest. They are sold at a discount to face value, and the interest is the difference between what you pay and the face value you receive at maturity. If a 26-week bill prices at $98.00 per $100 of face value, your roughly 2% gain over half a year works out to about 4% annualized. Those numbers are an illustration of the mechanics, not a quote; actual discount rates are set at weekly auctions.
Individuals can buy bills two ways: directly from the government through the TreasuryDirect system operated by the U.S. Department of the Treasury, with a minimum of $100, or through a brokerage account, which typically allows resale on the secondary market before maturity. TreasuryDirect holdings are less flexible; selling before maturity requires transferring the bill to a broker first, so money you might want back early is better held in the brokerage wrapper or not in bills at all.
No insurance, something arguably stronger
T-bills are not FDIC-insured because they do not need to be: they are direct obligations of the federal government, backed by its full faith and credit, the same backing that stands behind the deposit insurance funds themselves. Held to maturity, a T-bill returns its face value. Sold early, its market price can fluctuate with rates, which is the one way a Treasury holder can realize a loss on an otherwise guaranteed instrument.
The tax difference is bigger than it looks
CD interest is ordinary income at every level: federal, state, and local. T-bill interest is federally taxable but exempt from state and local income tax. In a state with a meaningful income tax, that exemption can make a bill's after-tax yield beat a CD carrying a higher headline rate. A resident facing a combined state and local rate of 8% keeps all of a bill's yield at the state level but only 92% of a CD's. Anyone comparing the two should compare after-tax yields for their own situation, and the interest reporting rules are laid out in IRS guidance on interest income.
Side by side
| CD | Treasury bill | |
|---|---|---|
| Issuer | Bank or credit union | U.S. government |
| Terms | Roughly 1 month to 5+ years | 4 to 52 weeks |
| Backing | FDIC or NCUA insurance to $250,000 | Full faith and credit, no cap |
| Early exit | Penalty, often months of interest | Sell at market price via broker |
| State income tax | Taxable | Exempt |
| Minimum | Varies; often $500 to $1,000, sometimes none | $100 at TreasuryDirect |
Investor-education basics on Treasury securities and other savings instruments are maintained at Investor.gov, which is worth bookmarking as a neutral reference.
Ladders: the standard way people use both
A ladder splits a lump sum across staggered maturities, say equal amounts in 3-, 6-, 9-, and 12-month rungs, so that a portion matures at regular intervals. Each maturity can be spent or rolled into a new rung at whatever rates then prevail. The structure reduces the sting of locking everything at what turns out to be the wrong moment and creates a steady schedule of liquidity without paying penalties. It works identically with CDs and bills; the mechanics are the point, not any particular set of rates.
Two mirror-image risks frame every lock-up decision, and naming them clarifies the trade a ladder is making. Interest rate risk is the chance that rates rise after you lock, leaving your money earning yesterday's yield while new deposits earn more. Reinvestment risk is the reverse: rates fall, your instrument matures, and the replacement pays less than what just ended. A floating savings account carries maximum reinvestment risk and zero lock-in; a five-year CD flips the ratio completely. Ladders exist precisely because they split the difference, converting one large bet on rate direction into several small, staggered ones.
When neither instrument fits
Locking a rate only makes sense for money with a timeline. Cash that must be reachable tomorrow belongs in a liquid account, and our explainer on high-yield savings accounts covers the floating-rate alternative in detail. Money you will not need for many years raises a different set of questions entirely, involving market risk and long-horizon growth, which sit outside the scope of cash management altogether.
I keep a plain-text note listing every locked dollar and its maturity date, because the failure mode I see most often is not a bad rate; it is forgotten money auto-renewing into a new term at a mediocre one. Banks are permitted to roll a maturing CD into a fresh certificate after a short grace period, typically around ten days, unless you act.
Next step: if you hold cash beyond your emergency fund with a known do-not-need-until date, write that date down, then pull current CD disclosures from two institutions and the latest auction results from TreasuryDirect. Compare after-tax yields for your state, check the exit rules, and calendar every maturity before you commit a dollar.
