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

I logged into my TreasuryDirect account today, and what do I see?

Just like when teaching class, if one person asks question, usually multiple people have the same question. Unless it’s that annoying person who always ask questions like “Do I have to put my middle name on the exam? Will you mark down for that?”

Anyways, someone asked how to calculate and compare T-Bill returns to online banks, even without adjusting for tax. I’ll base this off of the recent Treasury Bill auction results. Let’s take the most recent one:

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Where’s my cash? Back in December, I started forming a ladder of 6-month Treasury Bills by buying $1,000 of T-Bills at the beginning of each month. Soon, I will start reinvesting the first matured T-Bill into another 6-month T-Bill, thus having $6,000 spread out in total. So far, the strategy has worked very nicely, giving me an average equivalent taxable yield of about 5.5% (for my tax situation) in exchange for a little less liquidity. Still, I have access to $1,000 each month, and if I really need to, I can always use SellDirect to sell the rest at market value with a $45 fee.

I plan on ramping up to $2,000 a month, but the rest is mainly in online savings accounts because much of it is from various 0% APR balance transfer deals, and I like to be able to pay off the entire balance whenever I want. The last bit of my cash is in some longer-term CDs and I-bonds.

There seems to be some interest, so here’s a very quick example of what happens when you buy a 4-week $1,000 T-Bill.

1) Open an account at TreasuryDirect, link up checking/savings account.
2) Login, and select your amount and maturity date ($1,000)
3) You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
4) Auction occurs on Tuesday, and on Thursday the discounted amount ($99x.xx) is taken out of your account.
5) 28 days later, also on a Thursday, $1000 is put back into your account if you choose so. If there is a holiday both the purchase and maturity dates are moved together. I’ll do a better example later.

People who are looking for the next best place for their cash now that ING’s Winter Sale 4.75% APY sale is over, and HSBC Direct‘s 4.80% APY promotion is soon ending, should not forget to consider Treasury Bills. You sacrifice some liquidity, but recent 28-day T-Bills have been paying 4.50-4.60% interest. Since the interest is exempt from state and local taxes, the equivalent return (calculator) can easily top 5% for those in many states. I know you can even link TreasuryDirect up with Emigrant Direct and HSBC, but I’m not sure about Capital One 360. Anyone try?

You can see my T-Bills experiences here in reverse order. Auctions for T-Bills are on Mondays and Tuesdays, so if you want in for next week you should schedule them soon.

Although I messed up my Treasury Bill Ladder by switching to 6-month T-Bills, they continue to be a pretty good cash investment alternative for those people in states with high income taxes, as they are exempt from such taxes. For example, the most recent 6-month T-Bill paid a rate of 4.754%. Using my Equivalent Rate Calculator, and a federal tax rate of 25% and state tax rate of 9%, that’s the equivalent of a regular 6-month bank CD paying 5.40%. The 4-week T-bill equivalent rate is 5.07%.

For all my posts on Treasury Bills, please see here, reads bottom to top.