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T-Bills - Guide to U.S. Treasury T-Bills

Overview of T-Bill Safety, Interest Rates, Purchasing, and Tax Rules


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When it comes to “safe” investments, there’s arguably nothing safer than U.S. Treasury Bills. “T-Bills”, as they are often called, are very short-term bonds issued at a discount and mature in less than one year. These bonds are backed by the “full faith and credit” of the U.S. Treasury and would only become worthless if the U.S. Treasury itself went bankrupt.

For many investors, T-Bills are considered the single best place to park money that must not be exposed to any risk or may be needed in a short period of time. While the interest paid on T-Bills is less than that of money markets or savings accounts, an investor can rest assured that their money will be safe and available when their T-Bills mature.

T-Bill Maturities

Newly issued T-Bills can be purchased to mature, meaning your original investment plus interest is returned to you, in four different lengths: 4 weeks, 13 weeks, 26 weeks, or 52 weeks. T-Bills can be redeemed before maturity, but the amount you receive is subject to market demand for those securities and is not guaranteed by the Treasury.

Previously issued T-Bills can be bought and sold in the “secondary market” by investors through brokerages and banks. Since these T-Bills are bought in between their issue and maturity dates, an investor can find virtually any length maturity they desire less than 365 days.

The Treasury also offers “Cash Management Bills” with odd maturities such as 7 days or 101 days. However, these cash management bills are only available to large, institutional investors.

T-Bill Prices

T-Bills are issued at a discount to their face value. This means that a T-Bill is sold for less than its face value at maturity. This difference between the purchase price and the amount received at maturity equals the investor’s interest on the bond.

For example, a 52-week T-Bill with a $1,000 face value might be sold initially for $990. When it matures, the investor will receive the full $1,000. The extra $10 the investor receives is their investment return for purchasing the T-Bill.

The actual price, and thus the interest it pays to an investor, is determined when the Treasury conducts an “auction.” For individual investors, their T-Bill prices are set by a non-competitive bid in the auction, essentially giving them the average going rate for that auction.

T-Bill Interest Rates

As mentioned, T-Bill interest rates fluctuate depending on the purchase price set at each new auction. In general, T-Bills interest rates are less than CD’s, money market accounts, or corporate / municipal bonds of the same maturity. This decrease in rates is due to the increase in safety associated with T-Bills. Investors wanting a higher rate of return have to settle for a decrease in safety, even if slight, and invest in a non-Treasury security.

Taxes on T-Bills

The interest earned on T-Bills is included in your Federal income taxes in the year the bill matures, regardless of when you actually receive the money. This interest is reported to you on IRS Form 1099-INT and is considered ordinary income (as opposed to capital gains).

T-Bill interest is exempt from state and local incomes taxes. This tax treatment makes T-Bills more attractive to investors in states with higher income tax rates. When compared to a bank CD offering an identical rate, investors who must pay state or local income tax would end up with more after-tax income by owning a T-Bill.

Buying T-Bills

T-Bills can be purchased in virtually every type of investment account, including Coverdell ESA’s, UTMA / UGMA custodial accounts, and educational trusts. Additionally, many Section 529 plans offer a low-risk mutual fund option that is heavily invested in T-Bills.

T-Bills can be purchased directly from the U.S. Treasury in $100 increments. This can be done by setting up an account at TreasuryDirect.gov or by calling them at 800-722-2678.

Investors can also buy T-Bills indirectly through their bank or brokerage house. However, these T-Bills are generally sold to you out of the company’s inventory and will be marked up to help them earn a profit. This means that you’ll likely earn a slightly lower rate of return than buying them direct from the U.S. Treasury.

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