Treasury bills, CDs and money market funds all hold short-term cash, but they differ in who backs them and how you get out. T-bills are U.S. government debt, free of state and local tax. CDs are bank deposits with FDIC insurance and early-withdrawal penalties. Money market funds are uninsured mutual funds you can usually sell any business day.
You have cash set aside for a home down payment, a tax bill, or simply money you do not want in the stock market right now. A savings account feels too passive, and you keep hearing these three names. The right one depends less on which pays a few basis points more this week and more on when you need the money and how it is taxed in your state.
How do the three compare side by side?
The short version: they trade off protection, flexibility and taxes in different ways.
| Treasury bills | Bank CDs | Money market funds | |
|---|---|---|---|
| What it is | Short-term U.S. government debt | A bank time deposit | A mutual fund holding short-term debt |
| Terms | 4 to 52 weeks | Often 3 months to 5 years | No maturity; redeem on demand |
| Minimum | $100 at TreasuryDirect | Set by the bank | Set by the fund |
| Protection | Backed by the U.S. government | FDIC insurance up to $250,000 per depositor, per bank, per ownership category | Not FDIC-insured |
| Getting out early | Sell before maturity at market price | Early-withdrawal penalty | Sell any business day |
| Federal tax | Yes | Yes | Yes |
| State and local tax | No | Yes | Depends on what the fund holds |
How do Treasury bills work?
A T-bill is a short loan to the U.S. government that you buy below face value and redeem at face value. According to TreasuryDirect, bills mature in 4, 6, 8, 13, 17, 26 and 52 weeks, can be bought in $100 increments, and are auctioned weekly except for 52-week bills, which are auctioned every four weeks.
A worked example
This is a hypothetical illustration, not a current rate. Say you buy a 26-week bill with a $10,000 face value for $9,800. At maturity you receive $10,000. Your $200 difference is the interest. That is about 2% over six months, or roughly 4.1% annualized. You owe federal income tax on the $200 but, per TreasuryDirect, no state or local tax.
The main trade-off
You can hold a bill to maturity or sell it early through a broker. If rates have risen since you bought, an early sale can bring back less than you paid.
How do CDs work?
A CD is a bank deposit that locks your money for a set term in exchange for a stated rate. Investor.gov's CD page says the disclosure should state the rate, whether it is fixed or variable, when interest is paid, the maturity date and any early-withdrawal penalty.
Deposit insurance
The FDIC insures CDs at insured banks up to $250,000 per depositor, per bank, for each ownership category. Your single accounts at one bank are added together, so a $200,000 CD and a $100,000 savings account in the same name at the same bank exceed the limit.
Brokered CDs
Many brokerages sell CDs issued by banks. Investor.gov warns that deposit brokers are not licensed or approved by any agency, so check the background of whoever sells you one. Brokered CDs are often sold on the secondary market rather than broken early, which means their price can move with rates.
How do money market funds work?
A money market fund is a mutual fund that invests in short-term, liquid debt and pays dividends that generally track short-term rates. Investor.gov describes three types: government, tax-exempt (municipal) and prime.
The $1.00 share price
Most retail and government money market funds try to hold a stable $1.00 net asset value. Institutional prime and tax-exempt funds float their price. If a stable-value fund's price drifts more than half a cent from $1.00, it must reprice, which is called "breaking the buck." Investor.gov says this is very rare, but it has happened.
No FDIC insurance
A money market fund is not a money market deposit account. The fund is an investment, and the FDIC lists mutual funds among the products it does not insure, even when a bank sells them.
Which one fits your situation?
Match the product to when you need the money, then to your tax bracket.
Money you may need any day
A money market fund is usually the most flexible of the three. Read the prospectus to see whether it is a government or prime fund and what fees it charges.
Money you need on a known date
A T-bill or CD that matures just before the date avoids selling early. In a high-tax state, compare T-bills after state tax, since CD interest is taxed by your state and T-bill interest is not.
Balances above $250,000
FDIC limits apply per bank and ownership category. T-bills carry no such cap. Spreading CDs across banks is another route.
What are the risks?
None of these is risk-free, even though they are among the more conservative places to hold cash.
- Inflation risk: Investor.gov notes that low yields can trail inflation, so your cash can lose buying power.
- Reinvestment risk: When a T-bill or CD matures, the next one may pay less.
- Interest-rate risk on early sales: Selling a T-bill or brokered CD before maturity can mean a loss.
- Fund risk: A money market fund can lose value, and fees can eat into returns when rates are very low.
For how quickly each can turn back into cash, see our guide on liquidity risk. If you hold cash at a brokerage, also read what SIPC insurance covers, because it is different from FDIC coverage.
Frequently asked questions
Are Treasury bills better than CDs?
Neither is better in general. T-bills are exempt from state and local tax and have no insurance cap, while CDs can lock a rate for longer terms and are FDIC-insured within limits. Compare after-tax yield for the same term.
Is a money market fund FDIC-insured?
No. Investor.gov states that money invested in a money market fund is not guaranteed by the FDIC. A money market deposit account at a bank is a different product and is covered.
What is the minimum to buy a Treasury bill?
TreasuryDirect sells bills in $100 increments, with a $100 minimum.
Can you lose money in a CD?
If you hold a bank CD to maturity within FDIC limits, your principal is insured. You can come out behind by paying an early-withdrawal penalty, by selling a brokered CD below its purchase price, or through inflation.
Related: What is liquidity risk? · What is SIPC insurance? · What is an inverted yield curve?