What Is the Penalty of Cashing in T-Bills Before Maturity?

T-bills provide a safe place to move your money when the markets are shaky.

T-bills provide a safe place to move your money when the markets are shaky.

When you're a teenager, a lot of the tension between you and your parents is caused by the clash of their intellectual desire to let you grow with their emotional need to keep you safe. Investing can create the same kind of conflict, because the safest investments are the ones that provide the least growth. Still, CDs and Treasury bills have their advantages. If nothing else, they offer a place to safely store your money when markets are volatile. T-bills are more appealing because they have no formal penalty for selling early.

How T-Bills Work

Federal Treasury bills work much like bonds, although they represent a shorter-term investment. Bond terms usually range from one year to as many as 30, while T-bills have monthly, quarterly, semi-annual and yearly terms. Both are essentially IOUs. When you buy T-bills, you're loaning money to the government in exchange for a set amount of profit. For example, you might purchase T-bills for $980 and receive $1,000 for them a few months later when they mature. That $20 per T-bill represents your profit.

Selling a T-Bill

Selling a T-bill is a simple process. If you've bought yours through the Treasury Department's retail arm, Treasury Direct, you'll have to transfer it to a bank or brokerage first. The appropriate form is on the Treasury Direct website. If you purchase your T-bills through your bank or another dealer or broker, it's just a question of telling that source to sell it for you. There are no formal fees or charges involved in selling your T-bills before maturity, though you do forfeit the remainder of your potential gains. You also face the potential for loss through indirect costs.

Indirect Costs

Although the U.S. Treasury Department itself doesn't charge a fee for selling your T-bills prematurely, the brokerage or bank that handles the transaction for you almost certainly will. During times of low interest rates and low returns, even a small transaction fee can negate any profit from your T-bills. The value of your T-bills in the marketplace is determined by fluctuations in the exchange rate. If rates are going down, a T-bill increases in value and you might still turn a profit. If rates are going up, however, a T-bill decreases in value and might cause further losses.

Relative Liquidity

T-bills and other conservative investments, such as CDs, represent a balance between returns and liquidity. Liquidity means your ability to gain access to your money when you need it without unnecessarily high costs. For example, your savings account at the bank is completely liquid. You can withdraw from it any time you need to and you'll pay no penalty. CDs pay a higher rate of interest, but you'll pay a substantial penalty if you withdraw your funds before the maturity date. For many investors, the short maturity terms and comparatively high returns for T-bills make them an attractive option in this investment niche.

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