When the stock market feels uncertain, the conversation always turns to safe alternatives: I Bonds, Treasury bills, certificates of deposit. All three are backed by either the US government or federal deposit insurance, meaning your principal is essentially at zero risk. But they differ significantly in how they earn, how long they lock up your money, what they cost to buy, and how they’re taxed. Choosing the wrong one for your situation can mean earning less than you should, or locking up cash you need.
I Bonds: Inflation-Linked Government Savings Bonds
Series I Savings Bonds are non-marketable US Treasury securities sold directly at TreasuryDirect.gov. Their defining feature is an interest rate that adjusts every six months based on CPI inflation data, plus a fixed rate component set at purchase that stays with the bond forever. When inflation is high, I Bond rates can be very attractive. When inflation falls, they can drop below what CDs and T-bills pay.
Key I Bond Rules
- Purchase limit: $10,000 per person per calendar year (electronic), plus up to $5,000 via paper bonds through a tax refund
- Minimum hold: 12 months — you cannot redeem before one year under any circumstances
- Early redemption penalty: If you redeem before 5 years, you forfeit the last 3 months of interest
- Tax treatment: Federal income tax only — exempt from state and local tax; you can defer reporting interest until redemption
- Where to buy: TreasuryDirect.gov only (no brokers, no secondary market)
If you use I Bond proceeds to pay qualified higher education expenses, the interest may be completely federal-tax-free — subject to income limits. For 2026, the exclusion phases out for single filers between $96,800 and $111,800 MAGI, and for joint filers between $145,200 and $175,200. This makes I Bonds a powerful supplement to a 529 plan for middle-income families.
Treasury Bills (T-Bills): Short-Term Government Debt
Treasury bills are short-term US government debt securities sold at a discount and maturing at face value. You buy a $1,000 T-bill for, say, $975, and receive $1,000 at maturity — the $25 difference is your interest. T-bills are issued in terms of 4, 8, 13, 17, 26, and 52 weeks and can be purchased through most major brokerages at no transaction fee on new issues.
Key T-Bill Features
- Minimum purchase: $100
- Liquidity: Can be sold on the secondary market before maturity
- Tax treatment: Federal income tax only — exempt from state and local income tax
- Where to buy: TreasuryDirect.gov or any major brokerage (Fidelity, Schwab, Vanguard)
- Rate: Fixed at auction; tracks the federal funds rate environment closely
Certificates of Deposit (CDs): Bank-Issued Time Deposits
A CD is a time deposit offered by banks and credit unions at a fixed rate for a specified term. CDs are FDIC-insured up to $250,000 per depositor per institution, making them as safe as Treasuries for most people. The trade-off is full state and local tax liability on interest earned.
Key CD Features
- Terms: 3 months to 5 years, sometimes longer
- Early withdrawal penalty: Typically 60–365 days of interest depending on term
- Tax treatment: Fully taxable at federal and state level in the year earned
- Where to buy: Banks, credit unions, or brokerage CDs (brokered CDs can be sold on secondary market)
Use our CD Rate Calculator to see exactly what a CD earns at any rate over its term, and compare the after-tax return vs. other options. For a deeper look at how CDs compare to high-yield savings accounts, the savings account comparison guide covers the trade-offs in detail.
Side-by-Side Comparison
| Feature | I Bond | T-Bill | CD |
|---|---|---|---|
| Rate type | Variable (inflation-linked) | Fixed (set at auction) | Fixed |
| Minimum hold | 12 months (hard) | None (can sell) | None (penalty applies) |
| Purchase limit | $10,000/yr per person | None practical | None |
| State tax | Exempt | Exempt | Taxable |
| Liquidity | Low (locked 12 months) | High | Medium (penalty) |
| Inflation protection | Yes (built-in) | No | No |
| Best for | Long-term cash, high inflation | Short-term parking, flexibility | Known future expenses, rate lock |
The Tax Angle: Where T-Bills and I Bonds Have an Edge
State income tax exemption on Treasuries creates a meaningful after-tax advantage in high-tax states. A CD paying 4.8% in California (top state rate 13.3%) has an after-state-tax yield of about 4.16%. A T-bill paying 4.5% is exempt from California tax entirely, giving it a higher after-tax yield despite the nominally lower rate.
The formula to compare: Treasury yield ÷ (1 − state tax rate) gives you the CD rate you’d need to match a Treasury after tax. If you’re in a 6% state income tax bracket and a T-bill yields 4.5%, you need a CD yielding at least 4.79% to match it.
Which Should You Choose?
Choose I Bonds if you want long-term inflation protection, you won’t need the money for at least 12 months (ideally 5+ years), and you’re within the $10,000 annual limit. They work best as a permanent allocation for the safe portion of a long-term portfolio.
Choose T-bills if you need flexibility, your time horizon is short (weeks to a year), you’re in a state with income tax, or you have more than $10,000 to deploy. T-bills work particularly well as a money market alternative inside a brokerage account through automatic rollover programs.
Choose CDs if you know when you’ll need the money and want to lock in a specific rate, or you have a defined goal with a known timeline. For a strategy that maximizes both rate and flexibility, the CD ladder guide shows how to spread maturities so money is always becoming available.
The right answer often isn’t picking just one. Holding I Bonds for long-term reserves, T-bills for operating liquidity, and a CD ladder for medium-term goals can give you inflation protection, flexibility, and locked-in rates simultaneously. Use our Savings Calculator to model different rate and term combinations, and the APY/APR Calculator to compare rates quoted different ways so you’re always working with equivalent numbers. Our guide on high-yield savings accounts is also worth reading if you need full liquidity alongside a competitive rate.