T-Bills Still Good Bank Alternative at 5.29%+ APY
For those subject to state income taxes, Treasury Bills continue to be a good alternative to online banks since their interest is exempt from state and local income taxes. For example, at their current rates my personal tax-equivalent yield is over 5.70% APY. You do lose some liquidity though, so I don’t keep every penny in there. For more information, please check out the following posts in my T-Bill category:
How To Buy A Treasury Bill Online
Taxable Equivalent Rate Calculator
Calculating and Comparing Treasury Bill Returns
28-Day Treasury Bill APY Calculator
By Jonathan Ping | Treasury Bills and Bonds | 8/26/06, 11:58am
August 26th, 2006 at 4:39 pm
I believe you have mentioned before that one can setup your t-bills so that one comes due every week. This lessens the liquidity issue. I roll one 4 week T-Bill over every week. I just fund mine out of C of I and move the interest once a week to ED. If you do this on Thursday you are only losing a day’s interest. On a $10,000 T-bill you are losing one day’s interest on $40.00. With a marginal tax rate of 9.3% in CA T-Bills beat most everything else for this duration.
August 26th, 2006 at 4:43 pm
soo interest is exempt from state and local but NOT federal… What happens if you don’t have state or local. (florida)…
soo I wouldn’t see the savings I guess…
August 26th, 2006 at 4:53 pm
Yeah, if you have $4,000 to ladder that works nicely.
The advantage is definitely much more significant for those that are subject to state/local income taxes, although in the past few months the 28-day T-Bill has often been higher than those of online banks.
August 26th, 2006 at 5:12 pm
As an example, the most recent 28-day T-Bill has an investment rate of 5.166%, which if you continuously reinvest and sweep the ‘extra’ interest into Emigrant Direct or similar like mc does above, that gives you the equivalent of 5.29% APY. And this is ignoring any state tax considerations.
August 26th, 2006 at 7:38 pm
I’ve been buying the 28 bills lately myself. They offer a pretty good return for short-term money since I do have state income taxes to pay. If I lived in Florida, I would probably be sticking with CDs though.
It will be interesting to see what happens to rates after the FED meets next month…
August 27th, 2006 at 5:56 am
I don’t bother using my CofI. I asked my bank’s customer service how they handle having both ACH debits and credits on the same day, and they told me that they process credits, then debits (in decreasing order of size).
Since they gave that answer, I now just rollover my T bills into my chequing account. If a purchase and redemption occur on the same day, then I’m left with the interest in my chequing account, where it’s easier to sweep to savings; and, anyway, I already sweep my chequing account to savings once I’ve satisfied my liquidity requirements!
August 27th, 2006 at 5:57 am
Another tax benefit to T-bills is that tax is payable on them in the year of redemption, not in the year the interest accrued; this is different from a CD.
So, with a T-bill vs. a CD, you pay less tax, and on the T-bill, sometimes you get to hold on to the tax you hold a whole year longer.
August 27th, 2006 at 9:34 am
Ah.. I’m getting ready to post about this tomorrow, but I didn’t get the tax thing till I read the comments once more. Hm… Must look up those rates now…
August 28th, 2006 at 5:27 am
I’m in Florida but I have a ladder of 28-day T-bills. Most of my emergency fund are in ED and HSBC, but I have enough in T-bills to keep my interest and give me something to look forward to on Tuesdays and Thursdays.
Using the APY to APR calculator elsewhere on MMB, I’ve found that the APR of 28-day T-bills is higher than the APR of the Internet savings accounts. [1] The tax ramifications are the same for me. I suppose if I had enough money invested I would be suseptable to the Intangibles Tax in Florida [2], but I’m not that rich. The trick is to move the income in the C of I into an interest-bearing account each week.
I’m just hoping the gov’t sends me a consolidated 1099-INT at the end of the year so I don’t have to enter all (up to 52) 1099-INTs from the website into TurboTax.
[1] This is subject to change, of course, but has been true the past few months, I’ve noticed.
[2] How do you tax what is, admittedly, intangible? Does the form ask how many days you were happy (an intangible capital gain) and sad (an intangible capital loss)?
August 28th, 2006 at 8:47 am
Treasury Direct does NOT send a paper 1099-INT at the end of the year. There is a electronic 1099-INT available on the website after January 1 of the applicable tax year. You get a total and the breakdown. I just logged into my account to confirm the above. The ‘Manage my Taxes’ links by year are under the MANAGE DIRECT tab in TD.
September 5th, 2006 at 11:35 am
It looks like there are 8 day and 14 day t-bills that are paying better rates – is anyone switching to those, or do you still prefer the 28 day?
September 5th, 2006 at 8:44 pm
Yeah, you get an 1099-INT online.
14-day T-Bills are only offered sporadically, so you can’t really depend on them always being available. You can see if any are upcoming in the near feature on their website.
September 6th, 2006 at 7:02 am
The problem with the 8- and 14-day T-bills is that you cannot purchase them through Treasury Direct. One would need to go through a broker or other third-party, which would presumably cost money.
September 13th, 2006 at 11:55 am
Thanks for this very informative series of posts re T-Bills. I had been curious about them for a while now, and finally got around to investing in 28-day bills after learning all about them here. Nifty T-Bill returns calculator too.
October 10th, 2006 at 5:15 pm
Is there a way to set up the account to purchase a 28 day T-Bills that at its maturity, it will be re_purchased automatically, and it will transfer its gain (interes) to my linked checking/saving account?
This way I will need to setup/purchase just once and then wait to receive the gain each month from the normal bank account.
October 10th, 2006 at 6:56 pm
Not that I know of, tan. Repurchase? Yes. Transfer gain, no.
October 11th, 2006 at 5:08 am
Tan, it may be possible, but not sure about timing. If you have enough in your checking/savings account and can afford the withdrawl count, it may be done. Instead of depositing the redemptions in the C of I, send it to your checking/savings account, and use your checking/savings as the source of funds for the purchase.
The unknown part is the difference in time from when the redemption goes to the external account and when it draws from the account for the new T-bill. With the C of I, there’s no problem because there is no delay. Not sure about using an external accoung.
I use the C of I and just log in Thursday or Friday evening and transfer the C of I to my checking account.
January 24th, 2008 at 9:04 am
T bills may pay you dabbles of interest, but my company pays a lot more in interest, and instead of losing interest, you get your money on the day per day basis on which it was invested. Try beating 5 percent monthly increase of your funds. My number is -removed-. Call if your interested.
January 27th, 2008 at 6:12 pm
Can you say “Ponzi scheme”?
January 29th, 2008 at 4:17 pm
Well then why dont you tell that to my face, or should I just let you say that to multi million dollar network, or the United States army? I dont waste time with scam artists, idiots, or games. I have enough on my plate and i dont have time for people sarcastic people like you giving businesses like mine a bad name. Have you researched me? Have you researched my business partners? Have you researched my investment areas? Okay then. Let me know when you have. Dont waste time putting down honest businesses when you are too lazy to do your research. I didnt waste almost two years of research for nothing.
January 29th, 2008 at 4:21 pm
anyone know where you can buy the 5 and 8 day t bills?
January 29th, 2008 at 5:19 pm
Let’s keep on topic, and also please don’t self-promote in the comments.
June 19th, 2008 at 12:40 pm
To day is the first I am looking into t bills I would like to start purchasing t bills. I like this investment because I don’t have any investment knoelage and I think it is safe and better than bank rates. The comments I read here will help me to look in to parts of t bill I did’t know of. Thank you
June 20th, 2008 at 5:58 am
@Sharon: Actually, T-Bills earn very poor rate of return. The latest 1-, 3-, and 6-month T-Bills pay a APR of less than 2.5%. You can do better with an online savings account at this time.
If you live in a state with a high state income tax rate, then the tax-equivalent APR of T-Bills would be higher. I believe there is a calculator on this blog to help you make that calculation.