In this article, we summarize the pros and cons between CDs and Treasuries for fixed-income investors.
Key Differences Between Certificates of Deposit (CDs) and Treasuries
Factor | CDs | Treasuries |
---|---|---|
Security | – FDIC-insured up to $250,000 per depositor per bank. | + Backed by the full faith and credit of the U.S. government, Treasuries are considered among the safest investments, with security that surpasses even FDIC insurance. |
– Limited insurance coverage for amounts above $250,000 at each bank. | + No limit to the amount of protection. | |
Yield | + Generally higher yields for maturities of 1 year or longer. | – Typically lower yields for maturities over 1 year. |
– Lower yields for shorter maturities compared to Treasuries. | + Higher yields for short-term maturities (less than 1 year). Note: this could possibly change so double check yields before purchase. | |
Taxes | – Subject to both federal and state income taxes. | + Exempt from state income taxes. |
– State tax impact can reduce effective yield, especially in high-tax states. | + More tax-efficient, especially in high-tax states. | |
Maturities | – Limited availability for maturities beyond 5 years. | + Wide range of maturities (4 weeks to 30 years). |
– Flexibility can be restricted depending on the bank’s capital needs and availability of brokered CDs in a brokerage like Schwab or Fidelity. | + Extensive maturity options between 2023–2053. | |
Liquidity | – Less liquid, may involve fees or uncertainty of receiving original principal if sold early. | + More liquid, with an active secondary market for easy resale. |
– Brokered CDs can be sold in secondary markets but may involve a fee. | + Easier to sell with tighter bid/ask spreads. | |
Strategy Considerations | – Fewer maturity options for building a maturity CD ladder. | + Easier to build a flexible bond ladder portfolio. |
Convenience | + Banks often promote CDs with lower yields. | – Has to rely on Brokerage to purchase/sell Treasuries most times |
Detailed Tax Impact Comparison:
State Tax Impact | CDs | Treasuries |
---|---|---|
For High-Tax States | – State income taxes can reduce yield significantly (e.g., California, New York). | + State income tax exemption offers a clear tax benefit. |
Example | – In California, a 3-year CD yielding 3.90% after state taxes drops to 3.38%. | + A 3-year Treasury yielding 3.51% remains unaffected by state taxes. |
Breakeven Tax Rate | – For a CD to equal a Treasury’s yield, a state tax rate of ~10% or more may be required. | + More tax-efficient for investors in high-tax states. |
Conclusion
In summary:
- Choose Treasuries for shorter-term investments, tax benefits in high-tax states, greater liquidity, and a broader selection of maturities. In almost every case, Treasuries are the better option—except when considering longer-term investments.
- Choose CDs if you’re seeking higher yields on longer-term investments, are comfortable with state tax implications, and plan to hold the investment until maturity. Many investors opt for CDs due to the convenience of their bank, often overlooking the advantages offered by Treasuries, either intentionally or unintentionally.