What Happens When Treasury Bills Mature?
Understand the complete process of Treasury Bill maturity, from receiving your funds to managing subsequent investments and tax implications.
Treasury Bills (T-bills) represent short-term debt instruments issued by the U.S. Treasury Department. These securities do not pay regular interest payments, known as coupons. Instead, investors purchase T-bills at a discount from their face value, and upon maturity, they receive the full face value of the bill. The difference between the discounted purchase price and the face value constitutes the interest earned by the investor.
The Maturity Event
When a Treasury bill matures, the U.S. government automatically pays the investor the full face value. This payment includes the original principal amount and the earned interest. For instance, if a T-bill was purchased for $980 and had a face value of $1,000, the investor receives $1,000 at maturity, representing $20 in earned interest.
Receiving these funds requires no action from the investor. If purchased through TreasuryDirect, funds are automatically deposited into the linked bank account. If acquired through a brokerage account, the proceeds are credited to that account.
Reinvestment Decisions
Upon maturity, investors have several choices for the received funds. One common option is automatic reinvestment, often called rolling over the proceeds into a new T-bill. Investors can usually set this up at the time of the original purchase, especially when using platforms like TreasuryDirect. This allows the system to use the maturing funds to acquire a new T-bill.
Alternatively, an investor can elect to receive the cash proceeds. These funds are deposited into their designated bank or brokerage account, providing liquidity for other financial needs or expenditures. This choice allows for immediate access to the capital and earned interest.
Investors also have the flexibility to deploy the matured funds into other investment vehicles. This includes purchasing different types of Treasury securities, such as Treasury notes or bonds, which have longer maturities and pay semi-annual interest. The funds could also be used to invest in other market securities.
Tax Considerations
Interest income earned from Treasury bills is subject to specific tax rules. This income is taxable at the federal level, generally reported in the tax year the T-bill matures, and subject to the investor’s ordinary federal income tax rate.
A notable advantage of T-bill interest is its exemption from state and local income taxes. This can be particularly beneficial for investors residing in states with high income tax rates, as it reduces the overall tax burden on their T-bill earnings.
For tax reporting purposes, investors typically receive Form 1099-INT from TreasuryDirect or their brokerage firm. This form details the interest earned from U.S. Treasury obligations, which is then reported to the Internal Revenue Service (IRS).