Finding the Equivalent Bank Interest Rates For Savings Bonds

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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:

Savings Bond Tax Rate Conversion

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.

Added: I made a Javascript calculator for easy use – Equivalent Interest Rate For Savings Bonds Calculator

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  1. Been reading your blog the last few weeks. u got great material. thanks!

  2. Does anyone know where there is a site that lists the state and local tax brackets for a NYC resident? The official state site is awfully unclear.

  3. New York State: Single making between 30k-125k is 1,492 + 6.85% of the excess over 30k (i.e. someone making 100k would pay 1,492 + (100,000-30,000)*(.0685) = $6287.00 in State taxes. You can find this information on page 32 of form it201i_2004.

    New York City: Single making between 50k-100k is 1706 + 3.648% of the excess of 50k (i.e. someone making 100k would pay 1706 + (100,000-50,000) * .03648 = $3,530 in City taxes.
    You can find this information on page 36 of form it201i_2004.

  4. Thanks for explaining the math.

    That’s a nice rate, and keeps the money fairly liquid.

    I’m going to need to do some calculating now on whether or not it’s worthwhile to get some money out of CDs early and invest in Treasury Bonds instead. 🙂

  5. Anonymous says:

    Thank you ak for the information. that puts NYC residents in approximately, the 10% marginal state/local tax bracket, which means Jonathan’s calculations are very pertinent.

  6. I love when you post formulas 🙂

  7. I thought treasury bonds were taxed by the fed, but tax exempt from city and state? The only bond that is completely tax free is a muni, and you have to live in that state, otherwise it’s still taxed by your state. I’ve stayed away from munis because of AMT.

  8. Yes, that’s correct – isn’t that what I wrote? =) I know nothing about AMT, only that I am not affected… yet.

  9. bitstreamer says:

    Could this be a valid strategy to get an even higher yield from savings bonds?

    No 1099-INT

  10. Given that your suggestion to not pay tax if they don’t send you a 1099 is both illegal and the payoff is very small, I really don’t think the potential reward outweighs the risk…

  11. Thanks for the tip. I just found IRS documentation that supports what you’re asserting.

  12. Not all munis are subject to AMT. Only interest from munis that are considered Private Activity needs to be added back for AMT. Generally State & Local munis are not considered Private Activity.

  13. anonymous says:

    Stop ripping off material from FWF forums. You know what I’m talking about. This and the discussion about I bonds. If you copy, at least give credit where credit is due.

  14. I participate in a variety of forums, including Fatwallet Finance, Kiplingers, Moneybb, iBankDesign, and Diehards. My handle ‘jpsmoney’, perhaps have seen me post. In fact, I was the one who posted about this relationship specifically. I have linked to FWF several times in the past, but you can’t link to a specific entry and the explanation was in the middle of a 300 post thread.

    I’m afraid Savings Bonds are discussed in many different websites, not just FW =). I even tried to introduce T-Bill discussion at FW (see threads there for my posts), but not many people seemed interested, not sure why.

  15. I used your above equation and I was able to get it to work for the 0% and 5% state tax brackets within the three federal tax brackets. But I am having a problem with the 9% federal tax bracket. When I use the same equation, I am getting a lower equivalent bank interest rate. Shouldn’t the equation that you provided work across all three state tax brackets?


  16. To make it more precise, shouldn’t you add back the state tax deduction in federal tax return? I know it will change the conclusion by much, but may tilt the numbers by some.

  17. As I noted above, not everyone deducts state tax on their federal tax return. For example, I don’t. I just use the standard deduction, which you lose if you itemize. Thus, it is hard to exactly say how much you are saving even if you do get to deduct your state income taxes.

    However, if you or someone is willing to do the math, let’s share! =)

  18. Hi,

    I have been reading your blog and gotten interested in treasury bills.

    While I was comparing the “After Tax Return” from a Money Market Account and that of t-bills, I noticed an error in your formula.

    You compute the “taxable after tax return” as
    AfterTaxReturn(Bank) = Rate(Bank) * (1 – Fed Tax Rate – State/Local Tax Rate).

    However, it should be:
    AfterTaxReturn(Bank) = Rate(Bank) * (1 – Your Equivalent Tax Rate).

    The Equivalent Tax Rate: Fed Tax Rate + State Tax Rate – (State Tax Rate)*(Fed Tax Rate).


  19. paul – thanks for your comment; please check out the previous comments, I think your formula assumes that people are deducting their state taxes from their fed taxes. Not everyone does that.

  20. bharani says:

    It would nice if you can add a java calculator like the “RateChase” one.

  21. Way ahead of ya, I added a link to it in this post.

  22. Anyone know of a self-directed IRA that lets you invest in TBills free?

  23. I think Fidelity allows free Treasury Bill purchases.

  24. I am looking to defer T-bill income to 2008 by purchasing 1 yr T-bills. It is now Jan 2007. Is this a viable plan? Also I do not seem to be able to find an auction schedule for the 1 yr bills. I have a feeling the auction is not every Monday. Does anyone know were to find a schedule. Thanks

  25. I don’t think they offer 1-Year T-Bills right now. Treasury Bills are up to 6 months, and Treasure Notes are offered starting with 2-year terms.

  26. thanks for the great info!

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