CDs are passé with T-bill rates today! 09.01.2023
When taking a closer look at T-bill rates today versus bank CD best rates, it becomes easier to see why owning a Treasury bill trumps owning a certificate of deposit, all else being equal. In support of this opinion, the Washington Post published a recent Alexis Leondis’ opinion piece about bank CDs that did not mince words:
However, CDs issued by virtually every bank in the United States carry FDIC insurance protection, which is backed by the full faith and credit of the United States government – a safeguard against loss that is a strong magnet for conservative and risk-averse investors. Attracting the attention (some might say “affection”) of those seeking safety, the FDIC is happy to prominently feature its feel-good, government-supported guarantee directly on its website.
However, as Alexis Leondis was quick to point out in her opinion piece, there is a lot more to the story that investors need to be aware of!
Understanding that careful consideration of their respective features is essential, Treasury bills (T-bills), short-term government bonds issued by the US Department of the Treasury, almost always carry virtually all of the benefits of CDs (time deposits offered by banks), with a number of additional features and economic benefits.
T-bills often emerge as the superior choice due to factors such as their exceptional liquidity, safety backed by an unlimited federal government guarantee, potential for better interest rates (consider T-bill rates today), and significant tax benefits. Let’s take a closer look at these four specific (and compelling!) reasons why owning a Treasury bill may be more advantageous than owning a certificate of deposit.
1. Tax benefits
Owning and investing in T-bills offers clear-cut tax benefits in comparison to CDs. The interest income from T-bills, while still taxable at the federal level, is exempt from state and local taxes, presenting a notable advantage for investors residing in states with moderate to high state and local income taxes.
This state and local tax exemption enhances the after-tax yield of T-bills, and helps to contribute to more efficient returns on investment (ROI). Conversely, the interest paid by CDs is fully taxable at the federal, state, and local level, potentially reducing net returns for investors. The tax-favored treatment of T-bill interest enhances their appeal as a tax-efficient investment, particularly for those seeking to optimize their returns while minimizing tax liabilities.
2. Liquidity and flexibility
Treasury bills are renowned for their exceptional liquidity in the financial markets, are easily bought and sold, and offer distinct liquidity advantages over CDs. As short-term bonds issued by the US Treasury, these instruments are actively traded in the secondary markets, enabling investors the ability to easily buy or sell them (if need be) at prevailing market prices, even before their maturity. This dynamic secondary market presence provides a high degree of liquidity, enabling investors to swiftly convert T-bills into cash without incurring significant transaction costs. On the other hand, while CDs offer some liquidity, they often come with significant penalties for early withdrawals, which can discourage investors from accessing their funds before the CD matures.
3. Safety and risk
Treasury bills hold a distinct advantage over certificates of deposit when considering safety and risk. T-bills are issued by the US Department of Treasury, and are backed by the full faith and credit of the US government without limits. This government guarantee makes T-bills virtually risk-free, as the likelihood of default is exceedingly low. This level of security provides investors with a safe haven for their capital, particularly during uncertain economic times.
Conversely, while CDs offered by banks also carry a degree of safety, they are subject to the credit risk of the issuing bank. Although many CDs are insured by the FDIC, these insurance limits are relatively low ($250,000 per depositor, per FDIC-insured bank, per ownership category), especially when compared to the limit-free US government insurance that T-bills provide. Additionally, if an investor owns a CD issued by a bank that fails, an investor would then have to go through the FDIC Proof of Claim process. Having the express and unlimited backing of the US government for T-bills provides a strong extra layer of assurance, making them a preferred choice for risk-averse investors seeking a reliable and secure investment option.
4. Market interest rates
T-bill yields are often as competitive, and oftentimes more competitive, than the interest rates offered on CDs with comparable maturities, especially during periods of economic uncertainty or when interest rates are low. T-bill rates today haven’t been this high since 2001!
T-bills frequently offer yields that are competitive with or even surpass the interest rates provided by CDs. This advantageous rate positioning stems from T-bills being issued by the U.S. government, effectively eliminating default risk and allowing investors to earn a return commensurate with the market’s risk-free rate.
Here are the current bank CD best rates from Marcus, a leading online bank, for six and twelve-month CDs (as of 8.30.2023):
Versus T-bill rates today as listed on CNBC’s website (as of 8.30.2023):
When it comes to safe-harbor investments, don’t let the slick marketing of your local bank, or even the FDIC, influence your objective decision on how and where to invest your conservative money. T-bills offer an array of advantages over CDs, positioning them as the superior choice, especially for investors looking for security, liquidity, competitive returns, and tax benefits!
You’re Invited! Towerpoint Wealth’s 2023 Client Appreciation Gala
We’re thrilled to invite you to our big upcoming annual client appreciation gala! This is our way of saying “Thank You” for your incredible partnership, trust, and confidence in us. Without you, Towerpoint Wealth would not exist, and our mutual success wouldn’t be possible.
So it’s time to roll out the red carpet and raise a toast to you!
Click HERE to RSVP, and mark your calendar for an unforgettable evening of gratitude, camaraderie, and festivities at our upcoming Out of This World client appreciation gala at MOSAC, Sacramento’s newest museum of science and curiosity!
Click the images below to get caught up on some of our most recent trending moments at Towerpoint Wealth you might have missed!
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Out of this World!
As mentioned above, we are thrilled to be hosting our upcoming Out of This World annual client appreciation gala on September 28, and encourage you to click the image below to watch a fun 30 second preview of the event!
The TAX-FREE states
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming – the “select” nine states that do not levy a state income tax!
Living in a tax-free state sounds great, but does come with both cons and pros. Let’s explore some of these aspects:
Pros
1. Higher Disposable Income: One of the most significant advantages of living in a tax-free state is the higher disposable income. Without state income tax deductions, residents can keep a larger portion of their earnings, providing more financial flexibility for personal expenses, savings, investments, and leisure activities.
2. Attractive for Retirees: Tax-free states often appeal to retirees on fixed incomes who can stretch their retirement savings further without state income tax eroding their funds. This can lead to a more comfortable and financially secure retirement.
3. Business-Friendly Environment: Tax-free states tend to attract businesses due to the lower tax burden. This can result in increased job opportunities, economic growth, and potentially higher wages.
4. Cost of Living Benefits: In some cases, tax-free states also have lower overall costs of living, including property taxes and sales taxes. This can further contribute to an improved financial situation for residents.
Cons
1. Higher Property Taxes: To compensate for the lack of income tax revenue, some tax-free states may have higher property taxes or other forms of taxation. This can impact homeowners and renters alike, potentially offsetting some of the income tax savings.
2. Lower Public Services: Reduced tax revenue may lead to fewer resources available for public services such as education, healthcare, infrastructure, and social programs. This can affect the quality and availability of these services in certain areas.
3. Potential for Hidden Taxes: While some states don’t levy income taxes, they might have higher sales taxes, excise taxes, or fees that could offset the savings from not paying state income tax. Residents should carefully consider the overall tax burden.
4. Limited Tax Incentives: Tax-free states may offer fewer tax incentives for specific activities, such as education or home ownership, that residents in other states might benefit from.
When evaluating the decision to live in a tax-free state, individuals should consider their financial situation, lifestyle preferences, and the overall tax landscape. While the lack of state income tax can be enticing, it’s important to weigh the trade-offs and consider the broader implications on public services, property taxes, and other costs of living.
Click the image below to view our 2023 Tax Reference Guide, and download an excellent resource intended to help you stay on top of and organized with your tax planning this year!
There is a big difference between trying to simply make money, versus working to systematically build and protect wealth.
Which queue do you better stand in?
Thanks to VisualCapitalist for the caption and the chart, with data from the Global Wealth Report from Credit Suisse.
Reaping the rewards of tech revolutions, market booms, and more, the last decade has seen a remarkable increase in the number of global millionaires, which more than doubled between 2012 and 2022!
While the global 24/7 news cycle churns, twists, and turns, here are a number of fun, local trending events of note:
- September 1 – 3 – FoodieLand Night Market Food Festival – CalExpo
- September 2 – 4 – Chalk it Up! Art and Music Festival – Fremont Park, Sacramento
- September 2 – 4 – Farm to Fork Uncorked Weekend – Old Sugar Mill
- September 4 – 50 Cent, Busta Rhymes – Golden1 Center
- September 8 – Counting Crows – Thunder Valley Resort
- September 9 – Sac State Football home opener – Sacramento State University
- September 9 – 10 – Crawfish & Catfish Festival – Southside Park, Sacramento
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to contact us at any time, or call or email us (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an unsettled and complicated place, and we are here to help you properly plan for and make sense of it.
Joseph Eschleman, Jonathan, Steve, Lori, Nathan, Michelle, Luis, and Megan
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