Comparing The Tax-Equivalent Yields Of A 6-Month T-Bill And A 6-Month CD As Of 1/5/2023

RichardW | Jan 6, 2023 | 280 posts since 2019

If you are planning to buy some short-term CDs soon, don’t forget to consider short-term Treasurys. Depending on your taxable income and state of residence, their tax-equivalent yields may surprise you. As an example, let’s use the 6-month T-bill. From the Daily Treasury Par Yield Curve Rates (https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treas...), the 6-month T-bill had a yield of 4.81% as of 1/5/2023. According to the Taxable-Equivalent Yield Calculator available at Fidelity, if your principle state of residence is California, and your estimated taxable income is $59,000, and your federal tax filing status is single, the 6-month T-bill at 4.81% has a tax-equivalent yield of a 6-month CD at 5.54%. Changing the estimated taxable income to $118,000 and the federal tax filing status to married filing jointly produces the same tax-equivalent yield of a 5.54%. If you change the state to New York and leave all the other variables the same, the 6-month T-bill at 4.81% has a tax-equivalent yield of a 6-month CD at 5.28%. Repeating this procedure for Nebraska generates a result of 5.34%. For Missouri the result is 5.23%.

All of these results neglect local income tax, and assume that the Treasury Bill and the comparable CD are held in a taxable deposit account. The Taxable-Equivalent Yield Calculator available at Fidelity (https://digital.fidelity.com/prgw/digital/taxyieldcalc/) expresses yield as the effective annual rate of return in percent.

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rockies | Jan 6, 2023 | 255 posts since 2018

@RichardW
Thanks for another excellent post that is right on point.

I would like to expand a bit more on your insights. Using the same Treasury link you cited, one can observe that the 1-, 2-, 3-, 4- and 6-month T-bills all hit record highs today (January 5th) for the current Fed rate raise cycle. Perhaps even more interesting is that the 1-year T-bill hit 4.78% which is within 2 bps of the 4.80% high set on 11/7/2022. Depending on their investment horizon, investors may want to assess the taxable equivalent yield on all of these durations.

As one example, I saw a lot of positive comments and excitement today regarding the upcoming Navy Federal 5.0% APY, 15-month CD. In this case, investors in states with state income taxes will likely find that the taxable equivalent yield of a 12-month T-bill is significantly higher than the upcoming NFCU CD.

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deplorable_1 | Jan 6, 2023 | 896 posts since 2020

I prefer to buy a CD with a 2-3% cash back credit card if I want a higher tax free yield. Treasuries can't touch that. ; )

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GregoryInBelize | Jan 6, 2023 | 106 posts since 2022

Enjoy the cash back while you can, looks like Congress is still trying to end that perk.

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deplorable_1 | Jan 6, 2023 | 896 posts since 2020

Yeah I think I'll open another one today while this still works. lol

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eskayvee | Jan 7, 2023 | 1 posts since 2023

@deplorable_1
Can you share some information about how you do this - the credit card that allows you get the 2-3% cashback treating CD funding as a purchase and not a cash advance, the $$ amount that you can purchase, and the FI that allow CDs to be funded by CCs. In case you do not wish to divulge all the details, could you provide general answers such as - are these CCs issued by big banks such as like CIti, Chase etc. or small, obscure CUs; a range for the amounts allowed for such funding instead of the specific $$ limits on your CC; the FIs that have allowed this in the past instead of current offers. More importantly how does one go about finding such deals. Thanks!

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GH1 | Jan 7, 2023 | 758 posts since 2017

I don't see that as a option at any bank. Yes if it was we all be doing it. Even car dealers won't let you out more than 10k on card to buy. So yes I would like to know what bank allows that

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MY2CENTSWORTH | Jan 7, 2023 | 198 posts since 2016

GH1, Gotta look harder then! Obviously, there are dollar limits per transaction but no limit to the number of transactions. Do the math, 10K X 2% a number of times and BAM, you have made some $. deplorable_1 is correct and yes, at least one that I am aware of is considered a major bank. eskayvee, send deplorable_1 a private message, he's the expert and he will give you what you want to know or private message me and I'll give you the info on what I've been doing for a few years now. Hopefully, you can understand why it isn't best to make the exact details common knowledge on the world wide web, but the info is out there! Get creative!

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CuriousDave | Jan 7, 2023 | 154 posts since 2018

Try this site: www.bankbonus.com and look for the article headed How to Fund a Bank Account with a Credit Card. The article was last updated in November. The only FI on their listing that accepted any meaningful dollars was GTE Financial.
Bogleheads has a blogspot on this topic but the last posting was maybe 2 years ago. At that time PSECU was allowing CD purchases with credit cards. Unsure whether they still do.

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CuriousDave | Jan 7, 2023 | 154 posts since 2018

From a practical point of view, how important are comparative taxable interest rates to savers? They seem like a good way for financial “advisors” to promote tax exempt products and they make for an interesting academic exercise, but those of us who are savers cannot deposit comparative taxable rates in our bank accounts. I for one prefer to be able to compare the after-tax rates applicable to my own situation, especially since I am needing income.

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retired2022 | Jan 11, 2023 | 1 posts since 2023

I'm new to Treasury bonds, is it just as good or better to purchase them on secondary market thru Fidelity as opposed to trying to buy new issues? Fidelity rep said there was no downnside. Thoughts?

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RichardW | Jan 11, 2023 | 280 posts since 2019

retired2022…this article by Harry Sit of The Finance Buff https://thefinancebuff.com/buy-treasury-secondary-market.html discusses some of the pros and cons of purchasing secondary market vs new issue Teasuries. It also details how to buy secondary market Treasuries through Fidelity, Vanguard, Schwab, and Merrill Edge. This article by Harry Sit of The Finance Buff https://thefinancebuff.com/treasury-bills-cd-money-market.html describes how to buy new issue Treasuries through Fidelity, Vanguard, and Schwab.

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Evil_Capitalist | Jan 16, 2023 | 157 posts since 2022

I always go with new issue T-Bills and have purchased them both through Fidelity and TreasuryDirect. The primary advantage to going through Fidelity is (1) If you already have funds in there ready to go and (2)... When you check the T-Bill rates on that Monday afternoon on Fidelity's website, you are shown what the T-Bills for that week will be going for. Whereas on TreasuryDirect, you have to put your faith into the prior week's performance and hope that the bills you will be buying during that blind auction come in with a higher rate than the previous week.
At least with the secondary market, you know the firm price you are going to be paying.

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w00d00w | Jan 17, 2023 | 106 posts since 2012

the brokerages like Fidelity provide an estimated yield for T-Bills at auction. fortunately for savers, the auction yield has often been higher than the estimate during this time of deepening yield curve inversion.

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