Pin Me

Understanding T-Bills

written by: Nicki H•edited by: Rebecca Scudder•updated: 1/4/2010

T-Bills are a low-risk investment that allows you to earn a return quickly. Read on to learn about the benefits of t-bills and possible tax advantages.

  • slide 1 of 7

    What is a T-Bill?

    A T-Bill is a debt obligation that is backed by the United States government. These are designed to finance national debt. When an individual makes this type of investment, they’re essentially purchasing stock in the US government. The T-Bill is purchased at a price lower then the stated value, and investors can choose from a variety of terms; from 28 days to a year. The longer the term, the more money you’ll earn on the investment.

  • slide 2 of 7

    Safety of T-Bills

    This investment is very popular because it’s a less risk investment then more aggressive options; like the stock market. Investors can also earn money quickly without tying their money up for longer then a year. This investment is also considered to be very liquid – meaning you can transfer the investment easily. But the downfall of T-Bills is they earn lower returns then more aggressive options.

  • slide 3 of 7

    How to Purchase T-Bills

    T-Bills can be purchased from a bank, stockbroker or directly from the government’s Electronic Services for Treasury Bills, Notes and Bond service. Purchasing a T-Bill directly from the government will save you from paying commission; however you will be assessed a $34 fee if you sell before the maturity date. And if your holdings are larger then $100,000 you’ll be charged a $25 annual fee.

    Also, when purchasing directly from the government, you won’t have access to the shorter 4 week term. You’ll need to visit a bank or stockbroker to purchase this type of T-Bill. Also, ask your broker about 182-day t-bills, which are popular investments.

  • slide 4 of 7

    Competitive vs. Non-Competitive Bid

    When purchasing your T-Bill you’ll need to determine if you’ll make a competitive or non-competitive bid. If you place a non-competitive bid, you’re accepting the Treasury bill’s current interest rate without any negotiation. Many beginners use this strategy to make the process easy.

    However, you can also place a competitive bid which allows you to state what return you want to earn. If your rate is higher then the auction rate, it will be rejected. However, if it’s lower, you’ll secure your desired rate of return. If you haven’t completed competitive bids before, seek the assistance of a qualified stock broker to assist in this process.

  • slide 5 of 7

    Minimum T-Bill Purchase

    Previously, the government had a $1,000 minimum purchase on T-Bills. However, the rule has changed and now individuals can invest for as little as $100. The maximum investment allowed is 1 million dollars.

  • slide 6 of 7

    About Taxes on T-Bills

    When investing in T-Bills you are except from paying state and local taxes on your investment. However, you are required to claim this investment on your federal tax return.

  • slide 7 of 7

    Cashing in on T-Bills before they Mature

    If you decide to cash in on your T-Bill before it matures you have two options. You can sell it on the secondary market or the government will charge you a $34 fee for selling it back early. If you decide to sell on the secondary market, talk with your stockbroker or bank.