I’m thinking about setting up a CD ladder with around $30k, but then I came across T-Bills. They seem like a good way to avoid state taxes and get a similar return.
I made a Treasury Direct account but then realized that the rates aren’t set until after the auction. This uncertainty makes me wonder if CDs would be a better option for me. I live in Michigan, where there’s a flat 4% state tax.
I know you can buy already auctioned T-Bills through a brokerage, but I think that adds fees. Does anyone have advice on whether I should stick with CDs or go for T-Bills?
I buy T-Bills through Fidelity, and there are no fees. You can only buy them in $1,000 increments. I’ve never had any problems with it. I don’t use the auto-roll feature because I’ve heard mixed reviews, but I just set a calendar reminder to refresh my T-Bills every 8 weeks.
Even though you don’t know the exact rate in advance, you can get a good idea from the previous week’s auction.
Hartley said: @Yan
Oh, I thought there was a $1 per bond fee or something. Maybe I’m confusing it with other bonds.
Do you think T-Bills are better than a CD ladder right now, with the current rates?
Definitely go with T-Bills, especially since you’re avoiding state taxes. I use Fidelity’s auto-roll feature, and it works great. They recently added an option to cancel auto-rolls online, which was one of the issues people had before.
Keir said: @Yan
What’s wrong with auto-roll? I use it on Treasury Direct, and it works fine for me.
The issue is with how they handle the maturing bill and the new purchase. You need extra cash in your account to cover the new T-Bill before the maturing one settles. It’s not a huge deal, but it can lead to missed gains depending on your setup.
Avoid Treasury Direct if you can. It’s a hassle — you might get locked out of your account, spend hours on hold, or need a medallion signature from your bank. Use your regular brokerage instead.
Most brokers don’t charge fees for buying treasuries (auction or secondary market). If yours does, consider switching brokers. If you like knowing the exact yield, use the secondary market. Alternatively, you can look at ETFs like SGOV.
Freddie said: @Lake
I’ve never had an issue with Treasury Direct, but I only use it for I-Bonds.
It’s fine if everything works smoothly, but when problems come up, it’s a nightmare. I’d only use Treasury Direct for I-Bonds since you can’t buy those elsewhere.
I checked Fidelity since all my accounts are already linked there. I thought I saw a fee, but you’re the third person to say there aren’t any. I’ll double-check.
With ETFs, do you still avoid state taxes like you do with T-Bills?
@Hartley
Fidelity doesn’t charge fees for treasuries, but corporate bonds do have fees. As for ETFs like SGOV, they’re not entirely state tax-free because they sometimes hold short-term agency paper. Last year, about 93% of SGOV’s income was state tax-free. If you want complete certainty, stick to buying treasuries directly.
@Hartley
Here’s Fidelity’s fee schedule: https://www.fidelity.com/trading/commissions-margin-rates. Treasuries don’t have fees. Bond fees vary by type, and treasuries are usually treated differently by brokers. Every brokerage has a page that lists their fees, so it’s worth checking.
@Hartley
T-Bills usually have better rates than CDs, but sometimes you can find a CD that’s slightly higher. If your state has taxes, T-Bills are probably better since they’re state tax-exempt. CDs are less liquid and usually have penalties for early withdrawal, so I’d lean toward T-Bills.
T-Bills are short-term (one year or less). I’d just use an ETF for those. If you’re looking at longer-term treasury bonds, then a ladder might make sense. Most brokerages offer tools for building ladders that make it easy to set up.
T-Bill rates aren’t final until after the auction, but they don’t usually change much from week to week. It’s typically just a few basis points, so the difference on $10,000 isn’t huge.
CDs lock in a rate and eliminate that uncertainty, but they lose the state tax exemption. That matters more in high-tax states like California than in places like Texas. CDs also have early withdrawal penalties, whereas T-Bills can’t be cashed out early through Treasury Direct. Some ETFs that hold T-Bills let you sell anytime, though.
The main risk with T-Bills is opportunity cost compared to other investments like ETFs, but that’s a different kind of risk altogether.