I have to admit that the more I find out about what Schwab offers, the more I like being their client. Sound strange? A few months ago, I started looking at managing my cash more intelligently rather than just having it sit passively in a money market fund that wasn’t earning nearly as much interest as some other options available out there.
When I discovered that Schwab offered an easy way to purchase CDs online, I bought a few 3-month CDs through Schwab yielding 5.3-5.4%. Unfortunately, I soon realized that CDs were probably not the best investment out there for us. Why? Because as California residents, the interest earned from CDs would be subject to our state income tax rate of 9.3%, and there were other instruments out there with comparable returns that were exempt from state income tax: treasuries.
Last week, I started looking at buying treasuries again. T-bill yields had dipped in September but rebounded strongly and were certainly well worth the consideration of anyone who lived in a state with state income tax. (I’ve previously written about how to calculate tax-equivalent yields and provided an online calculator to do so, as well as about using Treasury Direct to buy treasuries, if you’re looking for some background information.)
So, this weekend I decided the time was right to act. I am still planning on purchasing some 4-week T-bills at auction tomorrow through Treasury Direct, but I was pleasantly surprised to discover that Schwab also offered me the option of purchasing 3-month and 6-month T-bills at today’s auction as well. (They don’t offer the 4-week bill). Putting in my order online very easy, and again, I liked being able to see as many of my accounts in one place as possible, rather than having to transfer my money to a bank account linked to Treasury Direct, as I originally thought I’d have to do.
Schwab doesn’t charge any transaction fee for buying treasuries at auction, and I get the full value of the treasury just as if I had bought it through Treasury Direct (note: this is not the same as buying T-bills or bonds on the secondary market, for which Schwab does take a cut.) If you’re thinking of doing the same, you’ll want to check with your broker (double-check even if Schwab is your broker in case charges vary by individual account types or amounts) because many of them do charge fees. For example, I looked into our E*trade account and saw that they would have charged me a $40 transaction fee for the same order.
After today’s treasury auction, I checked my account to make sure that my order to purchase 3-month T-bills showed up correctly, at the same price of $98.75128 as listed in the official Treasury Direct auction results page. On January 18, 2007, I will be paid $100 for each T-bill that I purchased, resulting in an APY of 5.17% (or an APR of 5.072%). But as a California resident, I benefit even more because T-bills aren’t subject to state income taxes. As a result, my tax-equivalent yield is more like 5.9% assuming a 25% tax bracket, and even more if my tax bracket turns out to be higher. For us, that’s certainly better than, say, the 5.19% 3-month CDs currently being offered at Schwab.
So, overall, I’m very pleased. I plan on buying more treasuries through Schwab in the same way that I would ladder a CD portfolio.