You have $50,000 in cash. You want it to grow safely.
Your bank offers a Certificate of Deposit (CD) at 4.0% APY.
The US Government offers a Treasury Bill (T-Bill) at 4.0% Yield.
They look identical, right?
Wrong.
If you live in a state with high income tax (like CA, NY, NJ, MA), the CD is significantly worse.
The secret lies in the State Tax Exemption.
Disclaimer: Rates and tax rules reflect market conditions as of Jan 1, 2026. This is for educational purposes. Consult a tax professional for your specific bracket.
Living in California or New York? Stop Buying CDs!
1. The "State Tax" Trap of Bank Interest
Interest earned from Bank CDs and High-Yield Savings Accounts (HYSA) is fully taxable at both the Federal and State levels.
- Federal Tax: Yes (10% - 37%)
- State Tax: Yes (0% - 13.3%+)
If you live in California (where top rates hit 14.4%) or New York City (State + City tax combined approx. 14.8%), the government takes a huge bite out of your return.
2. The T-Bill Advantage: 100% State Tax-Free
Treasury Bills are debt securities issued by the US Government.
Because they are federal instruments, the Constitution protects them from state and local taxation.
- Federal Tax: Yes
- State/Local Tax: NO (0%)
🧮 Let's Do the Math (2026 Rates)
Imagine you live in California/NY with a conservative 10% State Tax Rate.
- CD at 4.0%: After paying 10% state tax, your real yield is only 3.6%.
- T-Bill at 4.0%: You pay 0% state tax. Your yield stays at 4.0%.
The Verdict: To match the T-Bill, the bank CD would need to offer roughly 4.45%. Even in 2026, that premium is hard to find!
3. Liquidity: T-Bills Win Again
It's not just about taxes. It's about freedom.
- CDs: Your money is locked for 6-12 months. If you withdraw early, you pay a Bank Penalty (usually 3 months of interest).
- T-Bills: They are highly liquid. If you need cash, you can sell them on the Secondary Market any day.
*Note: You don't pay a penalty, but you sell at the current market price. Since T-Bills are short-term, price fluctuations are usually minimal.
4. How to Buy T-Bills (Don't Use TreasuryDirect)
Many people avoid T-Bills because the government website (TreasuryDirect.gov) is clunky and hard to manage.
Pro Tip: Buy them inside your brokerage account.
- Log in to Fidelity / Charles Schwab / Vanguard.
- Go to the "Fixed Income" or "Bonds" section.
- Select "Treasurys" -> "Auction" (New issues) or "Secondary" (Buy immediately).
- Enter the amount ($1,000 increments) and buy.
It’s as easy as buying a stock, and you see all your assets in one dashboard.
5. Who Should Stick to CDs?
T-Bills aren't for everyone. A CD might be better if:
- You live in a state with No Income Tax (Florida, Texas, Nevada, Washington). In this case, 4% is 4% for both.
- You want to lock in a rate for 5+ years (T-Bills are short-term; for longer locks, you'd need Treasury Notes/Bonds).
Keep More of What You Earn
In high-tax states, tax efficiency is the easiest way to boost your returns.
Why donate 10% of your interest to the state governor when you don't have to?
Switch your idle cash from a CD to a T-Bill Ladder, and give yourself an instant raise.
Helpful Resources:
Fidelity: How to Buy US Treasurys
Tax-Equivalent Yield Calculator
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