Best Short-Term Investment in 2025? In July 2025, many investors are evaluating low-risk, short-term investment options. The leading contenders are U.S. Treasury bills (T-bills) with maturities of six months or less, and one-year certificates of deposit (CDs). While both offer safety and fixed returns, T-bills have a powerful advantage: state and local tax exemption. This blog explores how T-bills outperform CDs, especially when factoring in after-tax returns for investors in various tax brackets.
What Are T-Bills and CDs?
- Treasury Bills (T-Bills): Issued by the U.S. Treasury, T-bills are sold at a discount and mature at face value. Terms include 4, 6, 8, 13, 17, and 26 weeks. As of April 2025, the 26-week T-bill yields about 4.2%. T-bill interest is exempt from state and local taxes but is subject to federal tax.
- Certificates of Deposit (CDs): CDs are bank-issued time deposits, insured up to $250,000 by the FDIC. A one-year CD currently averages 3.8%, with some banks offering 4.0% to 4.5%. CD interest is fully taxable at federal, state, and local levels.
- Yield Comparison: T-Bills vs. CDs Even though CD yields may seem close to T-bills, tax treatment makes a big difference in after-tax returns. Below are comparisons across several tax scenarios.
High-Tax State Example: California (Top Bracket)
- T-Bill (4.2% yield, taxed federally at 37%, no state tax): After-tax yield = 65%
- 6-month return on $10,000 = $132.30
- Annualized return = $264.60
- CD (3.8% yield, taxed at combined 50.3%): After-tax yield = 89%
- One-year return on $10,000 = $188.90
- Conclusion: T-bill earns $75.70 more per year.
No-State-Income-Tax Example: Texas (24% Federal Bracket)
- T-Bill: After-tax yield = 19%
- 6-month return = $159.60, annualized = $319.20
- CD: After-tax yield = 89%
- One-year return = $288.80
- Conclusion: T-bill earns $30.40 more
Moderate-Tax Example: New York (22% Federal, 6.85% State)
- T-Bill: After-tax yield = 28%
- 6-month return = $163.80, annualized = $327.60
- CD: After-tax yield = 70%
- One-year return = $270.40
- Conclusion: T-bill yields $57.20 more per year.
Why T-Bills Are the Smarter Option in 2025
- Tax Savings: T-bills are state and local tax-exempt, making them especially attractive for high-income investors in states like California, New York, Oregon, and Hawaii.
- Higher After-Tax Returns: Even with comparable nominal yields, the after-tax advantage means T-bills usually outperform CDs when adjusted for state taxes.
- Liquidity and Flexibility: With maturities as short as 4 weeks, T-bills offer flexibility. CDs lock your funds for longer, and early withdrawals often come with penalties.
- Government-Backed Safety: T-bills are backed by the U.S. government, making them among the safest investments available. CDs are FDIC-insured up to $250,000, but beyond that, they carry more risk.
- Easy Access for All Investors: T-bills can be purchased in increments as low as $100 via TreasuryDirect.gov or major brokers. CDs often have higher minimums and limited availability.
- Market-Driven Rates: T-bill yields reflect current market conditions through competitive auctions. CD rates may lag or vary by institution.
Advanced Strategy
Laddering T-Bills Create a T-bill ladder by staggering purchase dates (e.g., 4-week, 8-week, 13-week maturities). This ensures frequent liquidity and the ability to reinvest at higher rates. While CDs can also be laddered, their longer durations and tax disadvantages reduce flexibility and returns.
Tax-Efficient Benchmarking
To match the after-tax return of a 4.2% T-bill in California (13.3% tax rate), a CD would need to yield approximately 4.85%. That’s a high bar for most banks in mid-2025.
Risks to Keep in Mind
- Interest Rate Risk: If sold before maturity, T-bills may lose value.
- Inflation Risk: T-bills don’t adjust for inflation (consider TIPS if that’s a concern).
- CD Withdrawal Penalties: CDs penalize early withdrawals, while T-bills can be sold on the secondary market if needed.
T-Bills Lead the Way in 2025
For short-term investors looking to maximize returns and minimize taxes, short-term T-bills offer a clear advantage over CDs in 2025. With strong yields, tax savings, and flexibility, they’re a top choice for conservative investors. Explore the latest T-bill auctions at TreasuryDirect.gov and consider how they can fit into your strategy this year.
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