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.
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Can someone explain to me the difference between a bond and a CD? I am just now starting to get interested in one of these products as my husband and I have finished paying off our debt. I’m wanting to do a ladder of 6 months as described above.
I have been working on the same thing (6-month T-Bill ladder). I like the idea of timed deposits for an emergency fund because they can come due monthly like a paycheck.
Sarah,
From the investor’s point of view, the main difference is that a CD is taxable by your state as well as the Fed, while treasuries are not.
So if you live in a State with high-tax, T-bills are likely to be the better choice when compared to the highest yielding CD’s of the same maturity. However, if you live in a no-tax state like Florida, the CD is likely to be better. Jonathan made a great calculator for this comparison here:
http://motion-structure.live/archives/2006/01/equivalent_inte.html%3C/a%3E%3C/p%3E
Other key differences:
1. Minimum to invest for CD’s varies by bank. For T-bills, it’s $1000, or technically slightly less than that because the bills are actually sold at a discount to yield the $1000 at maturity.
2. The Treasury Direct website requires you purchase T-bills in multiples of $1000. Although this may vary by bank, CD’s can generally be any amount above the minimum.
3. This usually isn’t an issue with such short maturities, but if you later realize you need some of the invested money before maturity, you can opt to sell the T-bill on the secondary market. Treasury Direct charges $45 for this service. With a CD, the bank charges a penalty of a specified number of months of interest for early withdrawl – typically, this would be 3 months interest on a 6 month CD or 6 months interest on a longer-term CD.
Woops – I reread what I wrote and realize that first sentence is confuse. I’ll rephrase:
A CD is taxable by your state as well as the Fed.
Treasuries are only taxed by the Fed. No state tax.
This is rather a tax question than a bond vs CD question but I’ll ask anyway. I live in NJ for half a year and TX for another half. TX has no state income tax. How do I calculate the tax for my CD? Thanks.
New to this site. I’m got hit with the Alt. Min. Tax this year. I know I should avoid private mun. bonds. If I buy a T-Bill, would I have to pay Maryland State Income Taxes on the profits from T-Bill, considering I am in the AMT?
Frank,
I (thankfully) have not been hit with the AMT myself, and I’m by no means a tax expert.
With that said, I’m pretty sure AMT only affects your federal taxes, so I think you’re OK. (I’d feel better if someone else chimed in though.)
My guess is that maybe using T-bills could even help some taxpayers to avoid falling under the AMT classification.
i.e. using T-bill ladder for cash instead of a state-taxable account = Less state tax to deduct = less likely to qualify for AMT?
I’d be interested if anyone with more AMT experience could confirm this?
Hi,
Very new here live in nc and have loked at T-bills for some extra short term cash have 6k is there a primer on buying t-bills