CD Calculator and CD Ladder: Treasuries vs. CDs After Tax

A certificate of deposit pays a fixed rate for a fixed term, and banks quote it two ways. The interest rate, sometimes labelled APR, is the nominal annual rate before compounding. The annual percentage yield, APY, is what that rate actually earns in a year once interest is added to the balance and itself earns interest. The relationship is APY = (1 + r ÷ n)ⁿ − 1, where r is the interest rate and n the number of times a year interest is compounded. A balance after t years is then the deposit × (1 + APY)^t.

Compare CDs on APY, because it already reflects compounding. Two banks quoting the same 4.00% rate can pay slightly different amounts:

The gap between daily and annual compounding is small at these rates, about $81 a year on $100,000. What matters more is that you compare like with like: an APY against an APY, and, for Treasuries, the investment rate rather than the discount rate (explained below).

Illustrative example: the people and figures below are hypothetical, not real clients. Numbers are calculated from the stated assumptions.

The calculator opens on a $100,000 CD at an illustrative 4.00% APY for 24 months, compounded daily. The interest rate behind that APY is 3.922%. At maturity the CD is worth $108,160: $4,000 of interest in the first year and $4,160in the second, because the second year earns interest on the first year's interest.

The owner is in the 24% federal bracket and pays 5% state income tax, so $2,366 of the $8,160 goes in tax and $5,794 is kept. That is an after-tax yield of 2.84%, which is the number to hold against inflation. Run the inflation calculatoralongside it if you want to see what that is in today's dollars.

A CD's rate is a promise in both directions: the bank pays the rate for the whole term, and you leave the money for the whole term. Break the CD and the bank keeps a penalty, usually stated as a number of months of interest. Three months on terms of a year or less, six months on one to three years, and twelve months or more on longer terms are common, but there is no federal standard; the figure is in the account disclosure you receive when you open the CD, and it is worth reading before you buy.

The calculator charges the penalty as simple interest on the deposit at the nominal rate: deposit × rate × months ÷ 12. On the example CD a six-month penalty is $1,961. Broken after month 9, the CD has earned $2,985, so the owner leaves with $101,024, an annualized 1.37% instead of 4.00%. Broken earlier, before month 6, the penalty is larger than the interest and most banks take the difference out of principal.

Two details help. The interest the bank credited is still reported to you in full on Form 1099-INT, and the penalty appears separately in box 2; you deduct it on Schedule 1 of Form 1040 whether or not you itemize (IRS Publication 550). And some banks waive the penalty on the death of an owner, which matters for a CD held in one spouse's name. Ask before you buy.

CD interest is ordinary income, taxed at your federal bracket and by your state. Timing catches people out. Publication 550 says you constructively receive interest when it is credited to your account and available to you, even if you would have to pay a penalty to withdraw it. For a CD that pays or credits interest at least once a year, or that matures in a year or less, you report interest in the year it is credited or paid. For a CD that defers all interest for more than a year, the original issue discount rules apply and you report a share of the interest each year anyway (Publication 550). Either way, a five-year CD that pays everything at maturity still produces taxable income every year along the way. The calculator's year-by-year table shows that interest and the tax on it.

Treasury bills are the exception that is often useful in retirement planning. A bill pays no coupon; the interest is the difference between what you paid and the face value, and you generally report it in the year the bill matures. A 26-week bill bought in October therefore moves its interest into next year's return. Treasury notes pay interest every six months, taxed in the year paid. For how this interest fits with Social Security and withdrawals, see our guide to taxes in retirement.

Interest on Treasury bills, notes and bonds is subject to federal income tax but exempt from all state and local income taxes (Publication 550; TreasuryDirect). CD interest is taxed by both. So a CD has to pay more than a Treasury of the same term just to break even, and how much more depends on your state rate.

The algebra is short. With a federal rate f and a state rate s, a CD yielding c keeps c × (1 − f − s) after tax, and a Treasury yielding t keeps t × (1 − f). They are equal when c = t × (1 − f) ÷ (1 − f − s). This assumes the state tax is not deducted on your federal return, which is true for anyone taking the standard deduction or already at the state and local tax cap: most retirees. If you itemize and still have room under the cap, each dollar of state tax saves federal tax too, and the formula simplifies to c = t ÷ (1 − s). For a 4.00% Treasury and a 5% state rate that is 4.211% instead of 4.282% at the 24% bracket.

The example in the calculator's third tab sets a 4.00% CD beside a 3.80% Treasury. Before tax the CD looks better. After 24% federal and 5% state tax the CD keeps 2.840% and the Treasury 2.888%, so on $100,000 the Treasury leaves $48 more a year. The CD would win only in a state with a rate below 3.80%. In a state with no income tax, the higher yield simply wins.

Treasury sells bills at a discount and pays face value at maturity. Auction results show three numbers, and they are easy to confuse. The discount rate is the discount as a share of face value, annualized over a 360-day year: d = (100 − P) ÷ 100 × 360 ÷ days, where P is the price per $100. The price follows from it: P = 100 × (1 − d × days ÷ 360), rounded to six decimals. The investment rate, also called the bond-equivalent or coupon-equivalent yield, is the return on what you actually paid over a 365-day year: (100 − P) ÷ P × 365 ÷ days, for bills of up to half a year. It is always higher than the discount rate, and it is the one to compare with a CD or a note.

These are Treasury's own formulas, from 31 CFR Part 356, Appendix B (text of the appendix; TreasuryDirect on pricing). The calculator reproduces the appendix's worked examples exactly:

• a 90-day bill at a 7.610% discount rate prices at 98.097500;
• a 182-day bill priced at 95.934567 has a discount rate of 8.042%;
• a 20-day cash management bill at a 7.930% discount prices at 99.559444, an investment rate of 8.076%;
• a 364-day bill at 92.265 (a 7.65% discount) has an investment rate of 8.237%.

Two wrinkles: leap years and bills over half a year

The “365” in the investment-rate formula is the number of days in the year following the issue date. If that year contains February 29, Treasury uses 366. The appendix's example: a 26-week bill issued February 28, 2019 uses 365, one issued March 1, 2019 uses 366, because the year to March 1, 2020 includes February 29, 2020. The calculator lets you choose.

For bills longer than half a year, the 52-week bill in practice, Treasury treats the yield as if a coupon were paid at the half-year, which gives a quadratic: P × [1 + (days − y ÷ 2) × i ÷ y] × (1 + i ÷ 2) = 100. The calculator solves it the way the appendix does. Bills come in 4, 6, 8, 13, 17, 26, 52-week terms, from $100 in $100 increments (TreasuryDirect).

New Treasuries are sold at auction. Most individuals place a non-competitive bid, which guarantees you the amount you ask for, up to $10,000,000 per auction, at whatever rate the auction sets (TreasuryDirect). You do not know the rate until the auction closes; you can see recent results, which is the honest way to judge what the next auction is likely to pay.

You can bid two ways. In a TreasuryDirect account you deal with the Treasury directly, with no fees, but the site is basic, bids are non-competitive only, and you cannot sell there: a security must be held at least 45 days and then transferred to a bank or broker before it can be sold. Through a brokerage you can bid at auction too, usually without a commission, buy existing Treasuries of any maturity on the secondary market, sell before maturity, and see everything beside the rest of your portfolio. For most people who already have a brokerage account, that is the simpler route; TreasuryDirect suits those who want to hold to maturity and keep the holdings separate.

Bills run up to 52 weeks. Notes are sold for 2, 3, 5, 7, 10 years and pay interest every six months (TreasuryDirect); bonds run 20 or 30 years. Notes and bonds change in price when rates move, so selling one before maturity can mean a gain or a loss. Held to maturity, you get face value back. The bond calculator prices a note or bond between coupon dates.

Deposit insurance covers $250,000 per depositor, per FDIC-insured bank, for each account ownership category (FDIC). Credit unions have the same $250,000 share insurance through the NCUA (NCUA). CDs are deposits, so they are covered; Treasuries are not deposits and are not FDIC-insured, but they are direct obligations of the U.S. government, which is a stronger promise.

The ownership categories are what let a couple insure much more than $250,000 at one bank. The main ones are single accounts, joint accounts (insured up to $250,000 per co-owner), certain retirement accounts such as IRAs, and trust accounts, which since 2024 are insured up to $250,000 per beneficiary, for up to five beneficiaries (FDIC). Accrued interest counts toward the limit, so a CD bought right at the limit drifts over it. The emergency fund guideworks through a couple's accounts at one bank, and the FDIC's Electronic Deposit Insurance Estimator will check your own.

Brokered CDs

A brokered CD is issued by a bank but bought through your brokerage account. The appeal is choice and convenience: you can buy CDs from dozens of banks in one place, each with its own FDIC coverage, and see them beside your other holdings. Interest is usually paid out to the brokerage account rather than compounded, so the stated rate is closer to a simple yield than an APY.

The trade-off is how you get out early. A brokered CD usually cannot be returned to the bank for a penalty. Instead you sell it on the secondary market, at whatever price buyers offer. If rates have risen since you bought, the price is below what you paid, and the loss can be larger than a bank's penalty would have been; if rates have fallen, you may sell at a gain. Insurance covers the deposit, not that market price. Many brokered CDs allow the estate to redeem at face value when an owner dies, a feature worth confirming.

Callable CDs

A callable CD lets the bank end it early, usually on set dates after a short protection period. Banks pay a little more for that right, and they use it when rates fall, which is exactly when you would rather keep the higher rate. You get your money and interest to date back, with no penalty, and have to reinvest at the new, lower rates. Treat the yield on a callable CD as good only until its first call date, and compare it with a non-callable CD or a Treasury of that shorter term.

Illustrative example: the people and figures below are hypothetical, not real clients. Numbers are calculated from the stated assumptions.

A ladder splits money across several CDs or Treasuries that mature at regular intervals. It answers two worries at once. You do not have to guess which term will turn out best, because you hold all of them. And a rung comes due every year (or every six or three months), so money is always about to become available without breaking anything early.

For someone in or near retirement the common use is to cover several years of planned spending, the “bond tent” or “CD tent” idea: the next five years of withdrawals sit in safe, dated holdings, so a stock market fall does not force selling shares at a low. The calculator's ladder tab opens on that plan: $250,000 in 5 annual rungs of $50,000, at illustrative yields rising from 3.60% for one year to 4.00% for five, a blended 3.80%.

Interest is paid out each year rather than compounded, as notes and most brokered CDs do. Year 1 pays $59,500, falling to $52,000 in year 5 as the ladder shrinks. If you need a level amount, put slightly more in later rungs. The retirement withdrawal calculator helps decide how much of your spending the ladder should cover, and the savings goal calculator how long it takes to build one.

Rolling a ladder, and reinvestment risk

The other use is to keep a ladder going: when a rung matures, buy a new rung at the longest term. After 5 years every rung was bought at the long rate, and the ladder yields close to whatever five-year CDs pay at the time. That is the hidden risk: you do not know that rate. If new five-year rungs pay 4.00%, the example ladder earns $99,000 over 10 years. If rates fall and they pay 2.50%, it earns $72,750, and by year 6 its interest is down to $6,250 a year from $9,500. A ladder softens reinvestment risk, because only a fifth of it reprices each year, but it does not remove it. A single long CD locks the rate in for longer and carries the opposite risk, of being stuck if rates rise.

Two practical points. Mixing CDs and Treasuries in one ladder is common: use whichever pays more after tax at each term, which the third tab works out. And keep an eye on deposit insurance as rungs roll and interest accumulates; a ladder at one bank can creep over $250,000 per ownership category. The emergency fund calculator covers the cash you should keep outside the ladder.

CDs and ordinary Treasuries pay a fixed rate, so inflation erodes what they buy. Treasury sells two securities that adjust for it. Both share the state-tax exemption.

I savings bonds earn a fixed rate set at purchase plus an inflation rate reset every May 1 and November 1. Treasury combines them as fixed + 2 × semiannual inflation + fixed × semiannual inflation (TreasuryDirect); with an illustrative 1.00% fixed rate and 1.50% semiannual inflation that is 4.015%. You can buy up to $10,000 of electronic I bonds per Social Security number per calendar year, from $25. They cannot be cashed for 12 months, and cashing before 5 years costs the last 3 months of interest (TreasuryDirect). Federal tax can be deferred until you cash them. The limit makes them a modest add-on for most households rather than a ladder on their own.

TIPS are marketable Treasuries sold in 5, 10, 30-year terms whose principal rises and falls with the consumer price index. They pay a fixed rate, never below 0.125% at auction, on the adjusted principal every six months, and at maturity you get the adjusted principal or the original amount, whichever is more (TreasuryDirect). The catch for taxable accounts is that each year's inflation increase in principal is taxable federal income though you receive no cash for it until maturity, so many people hold TIPS in an IRA. A TIPS ladder is the inflation-protected version of the ladders above.

• Market prices. It assumes every rung is held to maturity. A brokered CD, note or bond sold early fetches a market price that the calculator does not model.
• Calendar-year tax timing.It taxes interest by CD year or ladder year, not by calendar year, and taxes a bill's interest when it matures. Your 1099-INT follows the calendar.
• Variable, step-up and callable CDs. It assumes one fixed rate per CD and no call.
• Today's rates. Every default is illustrative. Enter the rates you are offered.