One perk of U.S. Savings Bonds (USSB) and Treasury Bills is that they are exempt from state and local income taxes. For comparison, what would be useful is a quick way of comparing those tax-advantaged rates with the regular interest rates from a bank savings account or CD. So let’s do that. To start, we agree that we want find the equivalent bank rate that gives us the same after-tax return.
AfterTaxReturnBank = AfterTaxReturnUSSB
RateBank * (1 – Fed Tax Rate – State/Local Tax Rate) =
RateUSSB * (1 – Fed Tax Rate)
This gives us:
So, in my previous example I had a U.S. Treasury Bill paying 3.696%. I assumed a federal tax rate of 28% and a state tax rate of 10%. This makes the equation above:
RateBank = (1-0.28)/(1-0.28-0.10)* RateUSSB
(Equivalent) RateBank = 1.161 * 3.696 = 4.292%.
Overall, the higher your federal and local tax rates are, the better off you are with tax-advantaged investments from the U.S. Treasury, although it is much more sensitive to state and local tax rates.
As pointed out, this equation assumes that you are not deducting your state taxes on your federal taxes. I won’t get into that because it’s hard to say exactly how much more you are getting when you take into account that everyone gets the standard deduction anyways.