4 week T-Bills paying 4.471 and no state taxes

[goodtosave]

Have you considered lending money to the US Government directly? They are actually paying better than most banks. You can buy T-bills from Treasurydirect.com. Think of them like CDs. So the 4 week T-bills are like one month CDs. You can also buy 13 week and 26 week T-bills. You can purchase T-bills every week.

Here's the link to the T-bill rates for the past 3 months.
http://wwws.publicdebt.treas.gov/AI/OFBills

4 week T-bills for this week were paying 4.471% and T-bills are exempt from local and state taxes. So actually the rate is higher if you compare it with the bank rates that you pay local/state taxes on. Assume you pay 5% in state taxes, then you pre-tax interest rate for 4 week T-bills would be 4.7%. It's even higher if you are in the higher tax bracket for state.
The 13 week t-bills were paying 4.625% and the 26 week t-bills are paying 4.823%.

And here's the best part. You can link your TreasuryDirect.gov accounts with your checking and/or savings accounts. And no gimmicks or tricks with taking a number of days to transfer and losing interest. Your TreasuryDirect.gov account is credited and your bank accounts are debited on the SAME DAY!!! And it works with ING Direct and ED, it should work with other banks too.

The only downside is you have to keep buying the T-bills every 4 weeks to keep the funds in TreasuryDirect. You can also set it up to deposit the funds back to your bank accounts upon maturity. But TreasuryDirect have a way for you to keep buying new 4 week T-bills(recurring for up to 5 years) after the existing T-bills matures.


Have fun!

[goodtosave]

Today's(3/21/06) 28 day t-bills will pay 4.681% or about 4.93%(with the assumption that you pay 5% state tax).

This is better than any bank out there is paying for a 28 day CD or even the regular savings accounts with ED, ING Direct or HSBC.

[Russell]

I was under the impression that T-Bills are exempt from state and local taxes but you pay Federal taxes on the income ?

Anyone buying these ? What are some of the advantages and disadvantages ?

[sweeps]

Biggest advantage is it's an ultra-safe investment, and if you're in a state with high income tax, the effective yield is pretty good.

The biggest disadvantage is you can't access your money for up to 28 days, so I wouldn't put all my emergency fund money into it. Also if you're in a state with no income tax, it's not such a great deal compared to a high-yield savings account paying 4.75% or higher.

I think many people don't do it because it's a little more complex to deal with (see goodtosave's note on how to reinvest funds). Also the yield fluctuates more than your typical savings account.

[goodtosave]

Originally Posted by Russell

I was under the impression that T-Bills are exempt from state and local taxes but you pay Federal taxes on the income ?

Anyone buying these ? What are some of the advantages and disadvantages ?

Yes, T-Bills are exempt from state and local taxes.

The advantage is the rate is always competitive or better than what the money market may be paying(if you live in a state with state income tax).

In order to compare with T-Bill rates with bank rates, you need to add the 5% or whatever state income tax rate to the T-bill investment rate.

With today's investment rate of 4.681, it's 4.681/(1 - 0.05) = 4.93.

The formula to get a bank equivalent rate of your T-bill is:

T-bill investment rate / ( 1 - state income tax rate)

And as a comparison:
ING Direct interest rate is 4.65% or 4.75% APY.
HSBC interest rate is 4.7% or 4.8% APY.
ED interest rate is 4.41% or 4.5% APY.

Interesting that the banks always publish their APY rates and not the actual interest rates.


The disadvantage with T-bills is that you have to do some work to reinvest the funds or move the funds back to your bank account. But you can now reschedule the reinvestments for up to 5 years. And you can change the schedule to transfer the funds back to your bank. All these transfers and scheduling to buy and reinvest funds can be done online. You have to make sure your funds are either invested into the T-bills or transfer it back to the bank. You do not want your funds sitting in your treasury direct account because it doesn't earn interest.

And the transfers are done so that the debits and credits both happen on the same day so you don't lose any interest.

Hope that helps.

[goodtosave]

Originally Posted by Sweepsplayer

Biggest advantage is it's an ultra-safe investment, and if you're in a state with high income tax, the effective yield is pretty good.

The biggest disadvantage is you can't access your money for up to 28 days, so I wouldn't put all my emergency fund money into it. Also if you're in a state with no income tax, it's not such a great deal compared to a high-yield savings account paying 4.75% or higher.

I think many people don't do it because it's a little more complex to deal with (see goodtosave's note on how to reinvest funds). Also the yield fluctuates more than your typical savings account.

When comparing rates, make sure you add the state income tax rate into the investment rate for the t-bills. Most banks will list APY and not the real interest rates. So the 4.75% APY is 4.65% interest rate.

It's a little more complicated than a bank account. But it sure beats chasing the best rates. I believe it's generally comparable or higher than most liquid bank rates.

[Russell]

Thanks for the info Sweeps and Good2save - its definitely worth looking into specially in CA where I'm in the 9% tax bracket!

So I'm assuming the rates change each day and you lock in those rates for the term they're offered for ? I can see how that will quick become hard to keep track of if you were to buy $1k T-Bills every so often. BTW, I looked at TresuryDirect.gov and didn't see the rates listed I probably need to login. I actually opened an account with them for the I Bonds but never used it so maybe I'll login with that account and see if I can buy T bills with it.

Also, are these inflation protected like the I-Bonds ?

[goodtosave]

Originally Posted by Russell

Thanks for the info Sweeps and Good2save - its definitely worth looking into specially in CA where I'm in the 9% tax bracket!

So I'm assuming the rates change each day and you lock in those rates for the term they're offered for ? I can see how that will quick become hard to keep track of if you were to buy $1k T-Bills every so often. BTW, I looked at TresuryDirect.gov and didn't see the rates listed I probably need to login. I actually opened an account with them for the I Bonds but never used it so maybe I'll login with that account and see if I can buy T bills with it.

Also, are these inflation protected like the I-Bonds ?

The auctions are held each week. 13 week and 26 week T bill auctions are held on Mondays and 28 day auctions are held on Tuesdays on every week. You must place your orders before 12PM EST on those auction days. The T-bills are then issued on Thursdays of the week and your funds from your bank account are debited on Thursdays.

You can find the t-bills investment rates and the auction results on

http://wwws.publicdebt.treas.gov/AI/OFBills

I-Bonds rates comprised of a fixed interest rate and the CPI-U rate which is adjusted every six months. I Bonds are 30 year bonds and you have to keep it a minimum of 1 year. You are allowed to withdraw from year 2 to year 5 with last 3 months interest penalty.
More info can be found on:

i-bondrate.com

Jeffrey has a great article regarding I Bonds on the homepage of savingadvice.com.

T-Bills rates have no inflation protection built in but are more liquid.

[sweeps]

Originally Posted by goodtosave

When comparing rates, make sure you add the state income tax rate into the investment rate for the t-bills. Most banks will list APY and not the real interest rates. So the 4.75% APY is 4.65% interest rate.

Yes, good point.

[weiwentg]

Originally Posted by goodtosave

When comparing rates, make sure you add the state income tax rate into the investment rate for the t-bills. Most banks will list APY and not the real interest rates. So the 4.75% APY is 4.65% interest rate.

most banks list APY because different banks compound at different rates: some daily, some monthly, some quarterly. you could have 3 banks with the same APY, but the bank that compounds daily is going to have the lowest interest rate. you still end up with the same amount of money, though.

[goodtosave]

Most banks list APY because it's higher than the interest rate. For example, ING is paying only 4.65% real interest rate.

You will only get the APY if you leave your money in there for the whole year. Otherwise, you will get anywhere between the interest rate and APY depending on how long you keep it in the account.

[goodtosave]

FYI, the investment rate(interest rate) for 28 day t-bills to be issued 03/30/06 is 4.711%(no state tax) or 4.96%(assuming a 5% state tax).

[CJsoccerchic]

Ok I'm confused. So I hvae to BID on a t-bill and wait to see if I won the auction,like ebay style? where's the website that I would make the bids on the bills?

[CJsoccerchic]

.....

[sweeps]

Originally Posted by CJsoccerchic

Ok I'm confused. So I hvae to BID on a t-bill and wait to see if I won the auction,like ebay style? where's the website that I would make the bids on the bills?

No, regular investors make what's called a noncompetitive bid. The U.S. Treasury guarantees you'll get a T-Bill at the going rate. Usually only professional traders bid competitively.

[CJsoccerchic]

(example: So, I give treasurydirect.gov $990 for 28 days, then after the 28 days, they'll deposit $1000 into my account? or will they open up another T-bill for me automatically?)

[CJsoccerchic]

.........

[goodtosave]

Originally Posted by CJsoccerchic

(example: So, I give treasurydirect.gov $990 for 28 days, then after the 28 days, they'll deposit $1000 into my account? or will they open up another T-bill for me automatically?)

TreasuryDirect.gov will not automatically purchase another t-bill for you unless you tell them to. You can do one time purchases or you can schedule repeat purchases for up to 5 years. For each purchase and upon the maturity of the t-bill, you can instruct for the funds to either be transferred back into your bank account or to remain in the TreasuryDirect Zero Percent C of I account. The Zero Percent C of I account are used for repurchases purposes. You don't want your funds to sit in the Zero Percent C of I as it earns 0% as it name implies.

Hope that helps.

[goodtosave]

I started investing in T-bills about a month ago and are very happy with the investment rates.

I do have a word of CAUTION.

Bank accounts are governed by Regulation E(handed down by OCC a division of Treasury Dept.) which limits your losses against fraudulent and unauthorized access. Keep in mind that FDIC insurance DOES NOT PROTECT against fraudulent and unauthorized access.

TreasuryDirect.gov have no liability protection for the consumers if your account is compromised using your login and password. Here's what the security policy reads:

---------------------------
Regulations governing TreasuryDirect (31 CFR Part 363) state the following regarding liability and unauthorized access:

Who is liable if someone else accesses my New TreasuryDirect account using my password?
You are solely responsible for the confidentiality and use of your password. We will treat any transactions conducted using your password as having been authorized by you. We are not liable for any loss, liability, cost or expense that you may incur as a result of transactions made using your password.

Is Public Debt liable if the electronic transmission of my data is intercepted?
We are not liable for any interception of electronic data or communication.

---------------------------------------

I have confirmed this with some folks at the Treasury Dept. It is a little distressing to note that the Treasury Dept. imposes a much stringent rules on the banks it governs than on itself.

I would like to hear back from anyone who's familiar with the liability policies for treasurydirect.gov.

[CJsoccerchic]

So my example is on par? The giving of X amount will yield 1000$ after a set amount of time (because you can only purchas ein increments of 1k, right?

_____
and other question - Treasurydirect does not have a good security system set in so that users can feel safe logging in and out?