Lately, investors have many options to boost their savings. A few of the best investments that offer competitive returns and no risk to the principal include certificates of deposit (CDs), high-yield savings accounts, and Treasury bills (T-bills).
T-bills have been a popular option lately thanks to their attractive returns in light of rate hikes by the Federal Reserve. High-yield savings accounts also currently offer rates 10 to 20 times higher than traditional savings accounts while CD rates remain high for now.
All of these savings vehicles could be worth adding to your portfolio, depending on your investment time horizon. But first, it’s important to understand how they work and evaluate their differences to determine which is best suited for reaching your financial goals.
High-yield savings account vs. certificate of deposit vs. Treasury bill
A high-yield savings account is a type of deposit account that offers a higher annual percentage yield (APY) than you’d find with a traditional savings account.
A certificate of deposit is a type of time deposit account that requires you to keep your money on deposit for a specified period, known as the term. If you withdraw funds before the maturity date, you have to pay an early withdrawal fee. Often, CDs pay higher rates for longer term lengths.
Treasury bills are short-term securities issued by the United States Treasury, with terms that range between four and 52 weeks. They are considered a type of bond but don’t pay a coupon (interest). Instead, they’re often sold at a discount and provide the full value at maturity.
What is a high-yield savings account?
High-yield savings accounts can be found at many banks and credit unions. The main feature is that they offer an APY that’s much higher than what you’d receive on a traditional savings account. Because of that higher rate, they can be a useful tool for growing savings faster while keeping cash safe.
How high-yield savings accounts work
High-yield savings accounts work similarly to regular savings accounts. You deposit money into the account whenever you want, and the financial institution pays you interest on the balance. You can withdraw money as needed, although some banks may have a limit on the number of withdrawals you’re allowed to make per month and charge a fee if you exceed that limit. Some banks may also require a minimum opening deposit or ongoing balance.
“Essentially, the function is that your money is completely liquid and accessible whenever you need it,” says Autumn Lax, a certified financial planner (CFP) and financial advisor at Drucker Wealth Management.
Pros and cons of high-yield savings accounts
The main appeal of a high-yield savings account is the higher interest rate. As long as your money is deposited with a Federal Deposit Insurance Corp. (FDIC)-protected institution or National Credit Union Administration (NCUA) in the case of credit unions, your funds are also insured up to the federal minimums, meaning you can’t lose money.
But they can have some downsides worth considering. For one, the interest rate is variable, meaning it can go down. Some banks may also charge fees for these accounts. And though they pay higher rates than traditional savings accounts, you won’t grow your money as quickly as you could by investing in the market.
What is a certificate of deposit?
A certificate of deposit is a common type of deposit account that allows you to earn interest at a fixed rate over a specified term length. CD terms can last from a couple of months to several years, with the highest rates often reserved for the longest terms and largest balances.
You can access your money before the CD matures, but you’ll have to pay an early withdrawal fee, which can wipe out your interest earnings. CDs are a good option for people with longer savings timelines who want to grow their money without risk.
How certificates of deposit work
CDs can also be found at most banks and credit unions. When opening an account, you select the term length and add a deposit (depending on the financial institution, a minimum deposit may be required). Once the CD matures, you can withdraw your money, plus interest. Alternatively, you may have the option to roll those funds into a new CD.
Pros and cons of CDs
CDs are beneficial because you can be rewarded with a higher rate for keeping your money on deposit longer. There’s also no risk to your principal (as long as you stay under the federal limits for FDIC or NCUA protection).
The major drawback of a CD is that, while it can come with a high APY, your money is locked in and may not keep up with inflation, especially for longer terms. However, depositors can employ strategies to get the most out of a CD, such as opening multiple CDs at different intervals—known as CD laddering. There are also special types of CDs known as bump-up or step-up CDs that permit an interest rate adjustment once during the term.
“It can be the risk that you run, locking your money up for too long,” Lax says. “If you're going out on a CD ladder [over] multiple years, the rate you’re locking in might seem really great now, but we have no idea what the interest rate landscape is going to look like several years from now when that last CD matures.”
What are Treasury bills?
Treasury bills—also known as T-bills—are short-term securities issued by the U.S. Treasury. They’re backed by the federal government and offer terms ranging from four to 52 weeks. T-bills are sold in increments of $100.
How Treasury bills work
When you buy a Treasury bill, you’re lending the U.S. government money. T-bills are often sold at a discount or at par (face value). When the bill reaches maturity, you’ll receive the face value. “You make money by buying them at a discount, and then when they mature, you get in at full value,” Lax says. “So, whatever the difference is, is how you make your money.” T-bills can be purchased through the TreasuryDirect portal or a bank or brokerage.
Pros and cons of Treasury bills
Treasury bills can be a good choice for those looking for a low-risk, fixed-rate investment that doesn’t require setting money aside for as long as a CD might call for. However, you still run the risk of losing out on higher rates and returns if the market is on the upswing while your money is locked in. The good news is you can sell a T-bill before it reaches maturity without penalty.
How to choose between the three
Lax encourages her clients to look at the bigger picture when deciding how to shape their next investment move. “I always encourage them to look at their money, how it’s geared for different purposes, and in different time horizons,” she says.
Lax notes that both CDs and Treasury bills are considered safe harbor investments. But it’s also important to have some money set aside for emergencies in a fully liquid savings account. In other words, your financial situation and the immediacy with which you might need money down the line are the key considerations when picking among this trio. You’ll need to balance earning the highest rates with maintaining a certain amount of access to your funds.
Once you have your cash in the right place, Lax says you can then look at building out a well-rounded investment portfolio.
When choosing between a T-bill, CD, or high-yield savings account, here are factors to consider:
Security
All three of these types of accounts are secure. However, due to insurance limits, it will take a little more work to get the same level of security from a CD or a high-yield savings account as you get from a treasury bill.
Treasury bills are backed by the full faith and credit of the U.S. government. CDs and high-yield savings accounts are backed by the FDIC at banks and the NCUA at credit unions for up to $250,000 per depositor.
The maximum treasury bill you can purchase is $10 million, making it a great option for those who want security beyond $250,000 without using more than one financial provider.
While some banks tap into an IntraFi Insured Cash Sweep to extend the FDIC insurance beyond $250,000, this is relatively rare. To insure CD or high-yield savings funds beyond $250,000, you must open accounts at multiple financial institutions. If you have CDs in two banks, each with $250,000, then all $500,000 of your funds would be insured.
Yields
In recent months, treasury bills have had the edge over CDs and high-yield savings accounts when it comes to yields, though this may be changing.
With news that the Fed may cut interest rates in the coming months, longer-term treasury bill rates are dropping slightly. The 52-week coupon equivalent rate, above 5.00% for most of 2024, has now dropped below 4.50%. Shorter-term treasury bills are still above 5.00%.
Many online banks and financial technology companies (fintechs) offer strong CD rates and high-yield savings rates that can compete with treasury bills. Some of the high-yield savings rates have daily interest compounding, increasing your return.
One important thing to remember about high-yield savings accounts is that the rate you earn is variable. So, if interest rates begin to fall, your rate will be adjusted accordingly. CDs and treasury bills allow you to lock a rate in when they are purchased, giving you a fixed rate of return for the life of the account.
Taxes
Unless your state doesn’t have an income tax, treasury bills have a clear advantage regarding tax benefits. You won’t pay state or local taxes on interest earned on a treasury bill. You will pay federal taxes, however.
Interest earned on CDs and high-yield savings accounts are subject to federal, state, and local taxes. So, if your state or municipality charges income tax, you will keep less of your earnings with a CD or high-yield savings account.
Maturity lengths
High-yield savings accounts do not have a maturity length. It remains open as long as you maintain balance requirements and don’t exceed any transaction limitations.
CDs typically range from three to 60 months in maturity. They can be renewed at maturity, but the renewal rate will not necessarily be the same rate you had before. It will depend on the current rate of that particular CD at renewal.
Treasury bills range from four to 52 weeks. The rate is set at auction, and the interest earned is the difference between what you paid and the face value of the bill.
Liquidity
High-yield savings accounts have the most liquidity as funds can be withdrawn or transferred instantly. There may be holds on large withdrawals, but standard amounts should be available on demand.
Treasury bills have high liquidity as well. You can sell the treasury bill at any point before it reaches maturity. If you sell it before maturity, you won’t get the face value of the bill, so you will lose a little potential interest.
CDs are the least liquid of these accounts unless you open a no-penalty CD. Most CDs come with an early withdrawal penalty, which can cost you months of interest earnings for an early exit. However, no-penalty CDs typically allow access to your principal balance seven days after opening the CD.
Investment amount
Because of FDIC and NCUA insurance limits, you should limit investment into individual CDs or high-yield savings accounts to $250,000. You have the option to open accounts at multiple financial institutions, which will increase the amount of your insured funds.
For larger investments, a treasury bill may be the better option. You can purchase a treasury bill for up to $10 million. It is backed by the full faith and credit of the U.S. government, and you can sell it early if you need access to your money before maturity.
Does a CD, high-yield savings account, or T-bill offer the best rate?
Currently, savings accounts appear to be the best option for high rates with full liquidity. Some of the best high-yield savings accounts are above 5% right now.
Some of the top CD rates are as high as 5.25%, with terms as short as three months. Similarly, T-bills are paying between 4.38% and 5.25%, depending on the term.
What is the safest option between a CD, a high-yield savings account, and T-bill?
All three options carry a reputation for being highly safe, as your principal is protected from market risk. However, there is some liquidity risk for those who may need immediate access to their money.
“If you buy a six-month CD and you lose your job two months from now, you know that that money is accessible—but not without penalties,” Lax says. “So, the high-yield savings … is where I encourage clients to put their cash emergency reserve.”
How to open each type of account
All three of these types of accounts are relatively easy to open. Many financial institutions allow you to open CDs and high-yield savings accounts online. Others may require you to call a banking representative or stop at a branch location.
You will need to provide most of the following information to open an account:
- Social Security number for U.S. citizens or an individual taxpayer identification number (TIN) for others.
- Date of birth of the account holder. To prove your identity, you need to present documentation such as a birth certificate.
- A government-issued ID, such as a driver’s license or state identification card.
- Proof of address. This includes bills or a lease agreement.
- Contact information, such as a phone number or email address.
- Information for the funding account, such as the routing and account numbers.
To open a treasury bill, you can go through the government’s treasurydirect.gov website, or you can go through your bank or brokerage. Treasury Direct lists the following requirements to open an account:
- A taxpayer identification number (TIN) or Social Security number for an individual
- A U.S. address of record
- A checking or savings account
- An email address
- A web browser that supports 128-bit encryption
You will choose which type of account you want to open and then fill out the application. Once all documents are verified and forms are filled out, you will have a Treasury Direct account and can buy securities.
Other alternatives to CDs, HYSAs, and T-bills
While CDs, high-yield savings accounts, and treasury bills are great ways to earn interest on reserve funds, there are some other options to consider before investing:
- Government bonds: While returns can be lower than treasury bills, they are secure, as the government usually pays its debts. Also, you will get a fixed interest yield every six months, and earnings may be exempt from federal taxes.
- Dividend-paying stocks: If you are comfortable with a little more risk in your investments, dividend-paying stocks may be a good option. In addition to earning potential income as the stock price rises, you also earn dividend payments. These are often quarterly payments. However, if the stock price falls, the dividend payments might not be enough to keep you from losing money.
- Fixed annuity: While a fixed annuity offers even less liquidity than a CD, it can offer a longer-term structured payout. An annuity pays you a set return over a set period, usually monthly. These can be used the same way as retirement accounts, with the customer paying in over time and receiving payouts in the future. You also can open it with a lump sum of money and receive payouts earlier. However, early withdrawal penalties from an annuity can be severe.
Frequently asked questions
Is a T-bill or high-yield savings account better when saving for a large purchase?
It can depend on when you’ll need the money and what the rates are at the time you decide to start saving. But if you’re trying to save on a month-to-month basis, a savings account may be the best move.
“If you're someone who is needing to save up for a bigger purchase, so you're actively trying to put money aside every single month, then I lean toward having that in a savings account, because you can't add to a CD or a Treasury bill,” Lax says.
Can you sell a T-bill or a CD before it matures?
A Treasury bill holds this ability, and it can be carried out by first making a transfer and then asking a bank or broker to sell it for you. You won’t be charged a penalty, but you may need to pay a commission. The request forms for that can be found here.
A CD, meanwhile, isn’t bought or sold. However, you can choose to cash out a CD before it matures and pay an early withdrawal penalty.
What is a Treasury securities auction and how do I find the results?
This is a public auction held weekly by the U.S. Treasury. It’s the official method for issuing all Treasury bills. The auction is open to individual and institutional investors. There are also 24 primary dealers made up of financial institutions and brokerages that are required to participate.
Those interested in participating can get information about auctions through Treasury Direct.
