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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

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]

Re: 4 week T-Bills paying 4.471 and no state taxes

.....

[sweeps]

Re: 4 week T-Bills paying 4.471 and no state taxes

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.