How to Invest in 4-Week T-Bills: The Complete Process
The following questions were left at my recent post on 4-week T-bill rate:
When the 4 week period is over what happens to the money invested? Do you reinvest the money along with the interest earned ? Also what kind of tax document do they provide (1099 etc) and does that show the details for all the investment made over the year?
Though I have written on how to purchase T-bills through a bank account in the past, I never thought about a post on the complete process of T-bill investment until I read the above comments, which raise some basic yet practical questions about investing in T-bills (in addition to the rates). I feel the best way to answer these questions is to write an entry with detailed process for any one who is interested in investing T-bills but didn’t start yet.
Open a Treasury Direct account
To start investing in T-bills (not just Bills, but Notes, Bonds, TIPS, and savings bonds as well), you need to have a Treasury Direct (TD) account. There are three simple steps to open an account, you need to provide the following items:
- Social security number
- Driver’s license number or state ID and expiration Date
- Bank routing number and account number
- E-mail address
While the website says it will take about 10 minutes to complete the online application, the time after you complete the application till your account becomes available is likely to be longer. I remember when I opened my account four years ago, I had to wait a couple of weeks before I could use it. Things may have changed since then, but considering the waiting time for my EFTPS account (more than two weeks), I won’t be surprised if the process takes much longer time. (Edit: Reader Joe just commented that his account took 7 days to become available. So this probably is the time frame. Thanks Joe!)
Fund your account
Before making a purchase, you need to link a bank account (checking, savings, or money market) to your Treasury Direct account in order to fund your investments. TD offers two ways to fund your T-bill purchase: a bank account or Zero-percent Certificate of Indebtedness (Zero-Percent C of I or C of I). For me, my HSBC savings account is linked to TD account. Actually, you can probably can use any account with an account number and routing number to purchase T-bills, not necessarily a checking or savings account, as they are required to open your TD account.
Schedule your purchases
Now that your TD account is ready and you know which account you want to use to make the payment, you can schedule your investments.
To begin the setup, log in your TD account, then click the “Buy Direct” tab from the top menu bar and select Bills from the next screen. Submit your selection and you will be led to a new screen where you can enter details of how much and how often you want to invest, as well as sources to fund the purchases and receive principals and interests.
First, you choose how to make a purchase:
The product term is 4-week and the minimum purchase amount is $1,000. Here you can add the bank account as your source of funds.
Next, you select your investment frequency:
You can choose either to make a single purchase or repeat investments and investment period and frequency. The starting date can be any date you want and the first purchase will be made on the next Tuesday, the auction day and fund will be withdrawn from your bank account two days later.
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The final step is to set up the destination to receive the payment once the bill matures.
While you can use either a bank account or C of I as the destination of payments, sending the money to an interest-bearing account can make the most of your money. Since T-bills are sold at discount, what you pay is less than the face value of the bill that you will receive at the end of the period, with the difference being the interests. This means you will always have money left in your destination (you will have to keep at least $1,000 in your bank account since you won’t know in advance what the rate will be before the auction). If you use C of I as your destination, any money in it will just accumulate without earning your any interests. Of course, you can always transfer the money out of C of I, but sending the money straight to your savings account will make thing much easier. I use HSBC savings account as my destination.
If you want to make continuous purchases, you can easily set up a T-bill ladder (choose Repeat Purchases) with as little as $4,000, $1,000 each week for four weeks. At the end of the first 4-week period, your first purchase of $1,000 T-bill matures and payment will be sent to your designated account. If you establish a T-bill ladder, another purchase of $1,000 will be made on the same day you receive the payment. Since purchase is always made after payment, you don’t need to worry there isn’t enough fund in your bank account. After the first 4 weeks, the investments will keep going until you cancel it or the scheduled number of purchases are made. At tax time, you will receive a 1099-INT form (Edit: actually the form is downloaded from your online account) with all the transactions made in the past year and interests earned.
While investing in 4-week T-bills will give you a rate of return (this week’s rate is 5.267% APR) that no online savings account can match, you do have a little to give up: the liquidity of your funds and the minimum of $1,000 to start. Once you buy 4-week T-bills, you will have to wait 4 weeks when the bills mature to get your money (plus interests) back. This essentially locks your money for four weeks. Besides, if you want to build a T-bill ladder, you will need a minimum of $4,000.
Finally, a word of caution. If you use a savings account to fund your T-bill purchases, you have to be careful not to exceed the transaction limits (usually 6 withdraws per month) imposed by your bank. Check with your bank before using your savings account to make purchases.
Click here to calculate your equivalent yield.
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