I was snooping around the U.S. Treasury website looking up stuff on potentially laddering I-Bonds, when I came across Treasury Bills again. Treasury Bills are short-term investments (from 4-26 weeks usually) that common folk like us can also buy at TreasuryDirect.gov. The minimum investment is $1,000, and you buy them at a discount to their face value. In their example, you might pay $970 for a $1,000 T-Bill. I’ve never really bothered to learn much about them though, since their yields recently have beem much lower than online savings accounts like EmigrantDirect. For example, a recent rate for a 29-day T-Bill is 3.696%.
But, one key thing is that interest earned from T-Bills are exempt from state and local income tax. For example, if you were in the 28% federal tax bracket, and in a 10% marginal state income tax bracket, that’s 3.696% turns into 4.29%!!
Some things that cloud the picture are the fact that the price is set by auction, and it seems like you can’t participate directly in those auctions at TreasuryDirect – you just pay the rate that is decided at auction. But I would think the rates are somewhat predictible. Also, you could use laddering T-Bills to flatten out any rate swings. This definitely something I’m going to look into further. I might even buy one just to see how it works, since the maturities are so short. But anyone in a high tax state should take a second look.