How to Buy Treasury Bills: TreasuryDirect vs a Brokerage

Treasury bills, often called T-bills, are short-term loans you make to the U.S. government. They are backed by the full faith and credit of the United States, mature in a year or less and are exempt from state and local income taxes. For savers with cash they will need in the near future, T-bills can be a simple, low-risk option. This guide explains how Treasury bills work and how to buy them through TreasuryDirect or a brokerage account.

How Treasury Bills Work

T-bills are sold at a discount to their face value, also called par value. You do not receive periodic interest payments. Instead, you pay less than face value at purchase and receive the full face value at maturity. The difference is your interest.

For example, if you buy a T-bill with a $1,000 face value for $980, you receive $1,000 at maturity, earning $20 in interest. The actual price depends on the result of the Treasury auction.

Available Terms

The Treasury regularly auctions bills with terms of 4, 6, 8, 13, 17, 26 and 52 weeks. It also issues cash management bills with other terms from time to time, generally available through brokerages and banks rather than TreasuryDirect. Shorter terms let you keep money more accessible, while longer terms lock in a rate for more time.

How T-Bills Are Taxed

Interest on Treasury bills is subject to federal income tax but exempt from state and local income taxes. This can make T-bills more attractive than bank accounts or CDs with similar yields, especially for residents of states with higher income taxes. Interest is reported on Form 1099-INT, generally in the year the bill matures.

Option 1: Buying Through TreasuryDirect

TreasuryDirect is the U.S. Treasury's website for buying securities directly from the government.

Steps

1. Open an account at TreasuryDirect.gov, providing your Social Security number, a U.S. address and a bank account for funding and payments.
2. Choose the term and amount. You can buy in increments of $100, with a minimum of $100.
3. Place a noncompetitive bid, which means you agree to accept the yield determined at auction. Noncompetitive bids are filled in full up to the legal limit.
4. Choose whether to reinvest automatically at maturity.
5. The purchase amount is withdrawn from your bank on the issue date, and the face value is deposited at maturity unless you choose to reinvest.

Pros and Cons

TreasuryDirect has no fees and lets you buy directly from the government. However, its interface is less modern than many brokerage platforms, and selling before maturity is not possible within TreasuryDirect. To sell early, you would need to transfer the bill to a brokerage, which involves a holding period and extra steps.

Option 2: Buying Through a Brokerage

Most major brokerages let you buy T-bills either at auction or on the secondary market.

At Auction

You place an order before the auction deadline, and the brokerage submits a noncompetitive bid on your behalf. Many large brokerages do not charge a commission for new-issue Treasuries bought online, but check the fee schedule.

On the Secondary Market

You can also buy previously issued bills from other investors, choosing from many maturity dates. Prices and yields fluctuate with the market. Secondary-market purchases give you flexibility to pick a specific maturity date that matches when you will need the money.

Pros and Cons

Brokerage accounts make it easy to keep T-bills alongside other investments, sell before maturity if needed and automate rollovers. Selling early means you receive the market price, which could be higher or lower than your purchase price depending on interest rates.

Understanding Yield

T-bill yields are often quoted in two ways. The discount rate is based on face value, while the investment rate, also called the bond-equivalent yield, reflects the return on the amount you actually paid. The investment rate is more useful when comparing T-bills with bank savings or CDs that quote an annual percentage yield.

When T-Bills Make Sense

• Saving for a known expense within a year, such as a tax payment, tuition or a home purchase.
• Holding cash above deposit insurance limits.
• Earning a competitive yield while reducing state income taxes.
• Building a ladder of maturities so money becomes available at regular intervals.

T-bills are less convenient for an emergency fund you might need tomorrow. For instant access, an insured account may be better; see our comparison of a money market account vs high-yield savings account.

Risks to Consider

Default risk is considered very low because the bills are backed by the U.S. government. The main risks are opportunity cost and reinvestment risk: if rates fall, you may reinvest at lower yields. If you sell before maturity in a brokerage, you face market price risk.

T-Bills in a Broader Plan

T-bills can be useful for retirees keeping a cash buffer for withdrawals, a strategy discussed in our guide to the 4 percent rule. They can also hold money set aside for estimated tax payments, which pairs well with our W-4 withholding guide.

Common Mistakes to Avoid

New T-bill buyers often make a few avoidable errors. One is forgetting that the purchase is withdrawn on the issue date, not the auction date, so the linked bank account must hold enough cash at that time. Another is comparing the discount rate with a bank's APY, which understates the T-bill's true return. A third is setting automatic reinvestment and then needing the money at maturity. Finally, some buyers forget to report the interest on their federal return, even though they receive no state tax bill. Keep your confirmations and Form 1099-INT with your tax records.

The Bottom Line

Treasury bills are short-term, government-backed securities that are free of state and local income tax. You can buy them directly at TreasuryDirect with no fees or through a brokerage for more flexibility. Match the term to when you need your money, compare yields using the investment rate, and keep an insured savings account for true emergencies.