Treasury Bills — how interest is paid & taxed
Hi Terry,
I am confused. In your The Savage Truth column you state that you will get interest payments sent to your bank if you purchase T Bills. Do you mean on a monthly basis or when the bills mature? Does the interest rate accumulate each month until maturity at which point you receive that accumulation? Sorry if these are dumb questions but when I researched T Bills on vanguard it stated ‘Treasury bills have maturities of 1 year or less. Unlike most other bonds, these securities don’t pay interest. Instead, they’re issued at a “discount”—you pay less than face value when you buy it but get the full face value back when the bond reaches its maturity date’. Please help me to understand.
Thank you,
Terry Says
With Treasury bills, the interest is paid “up front.” That is, if you buy $10,000 of T-bills, they will take less than $10k out of your account, essentially paying you interest in advance. Same thing will happen if you automatically roll over your T-bills when they mature. But at that point, the Treasury will deposit your interest the week after the rollover auction.
And that payment process actually increases your yield on the T-bills by a bit, since you can earn “interest on the interest” that is in your MM account!
But in January you will get a 1090 from Treasury stating “interest earned” for Federal tax filing purposes. There is no state income tax on Treasury bill interest.
