When a Treasury bill matures, the government pays you its full face value, and the gap between that face value and what you originally paid is your interest. That is what happens when a T-bill matures: the payout is automatic, it lands in either your linked bank account or your brokerage cash account on the maturity date, and no redemption request is required from you.1TreasuryDirect. Treasury Bills What varies is where the money lands, whether it rolls straight into a new bill, and how it gets taxed.
Where the Money Lands
If you hold the bill through TreasuryDirect, the face value is sent to your linked bank account through the ACH network on the maturity date. If maturity falls on a weekend or federal holiday, payment happens the next business day, and no extra interest accrues for the delay.2eCFR. 31 CFR 356.30 – When Does the Treasury Pay Principal and Interest on Securities
You can also route the proceeds inside TreasuryDirect to a Certificate of Indebtedness, a zero-percent holding account whose only job is to park cash until you use it to buy another security or move it back to your bank.3eCFR. 31 CFR Part 363 Subpart D – Zero-Percent Certificate of Indebtedness It earns nothing while it sits.
If you bought the bill through a brokerage, the broker credits the face value to your core settlement or money market account on the morning of the maturity date. That cash is available right away for withdrawal or another purchase, and the settlement fund itself usually pays a small yield. You do not need to submit anything.
If the Bank Payment Fails
When TreasuryDirect’s ACH transfer bounces because your linked account is closed or the number has changed, the Bureau of the Fiscal Service holds the funds and notifies you electronically. The held money earns no interest.4eCFR. 31 CFR Part 363 Subpart B – General Provisions Governing Securities Held in TreasuryDirect Log in, fix the bank information, and the payment goes out again. The Fiscal Service may also redirect the payment to another bank account you have designated as primary.
Rolling Into a New Bill Instead
You can schedule the maturing bill to reinvest automatically into a new bill of the same term. Set this up when you first buy, or any time up to four business days before maturity, and edit or cancel it inside that same window.5TreasuryDirect. Redeem/Reinvest Treasury Bills
Because bills are sold at a discount, the new bill costs less than its face value. The Treasury applies the maturing face value toward the new purchase and sends the leftover, which is your interest from the old bill, to your linked bank account or C of I. If rates have moved since you first bought, the discount on the new bill shifts and the refund adjusts with it.
TreasuryDirect caps how many consecutive reinvestments you can schedule at one time, and the limit depends on the term:6eCFR. 31 CFR 363.205 – How Do I Reinvest the Proceeds of a Maturing Security
- 4-week bills: up to 25 consecutive reinvestments
- 13-week bills: up to 7 consecutive reinvestments
- 26-week bills: up to 3 consecutive reinvestments
- 52-week bills: 1 reinvestment
When the cycle ends, the final bill’s face value is paid to your bank unless you set up a new one.
How the Interest Is Taxed
The discount you earn is interest income for federal tax purposes, not a capital gain, and you report it as ordinary income for the year the bill matured.7Office of the Law Revision Counsel. 26 USC 1271 – Treatment of Amounts Received on Retirement or Sale or Exchange of Debt Instruments The tax code specifically says the discount on a short-term Treasury obligation does not accrue until the bill is paid, sold, or otherwise disposed of, so you owe nothing along the way.8Office of the Law Revision Counsel. 26 USC 454 – Obligations Issued at Discount
After year-end, TreasuryDirect or your broker sends a Form 1099-INT. T-bill interest goes in Box 3, “Interest on U.S. Savings Bonds and Treasury Obligations,” not Box 1.9Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Report the amount on Schedule B of your Form 1040.10Internal Revenue Service. Instructions for Schedule B (Form 1040)
No State or Local Tax
T-bill interest is exempt from state and local income taxes because federal law bars states and their subdivisions from taxing federal obligations.11Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation If you live in a high-tax state, this is why a T-bill at a given rate leaves you with more than a bank CD or savings account paying the same rate.
What Happens if You Don’t Report It
Leaving 1099-INT interest off your return can trigger an accuracy-related penalty of 20% on the underpaid tax. Omitting income shown on an information return is listed by the IRS as a form of negligence that draws this penalty.12Internal Revenue Service. Accuracy-Related Penalty
Backup Withholding
If your broker or TreasuryDirect does not have a valid Taxpayer Identification Number on file, T-bill payouts are subject to backup withholding at a flat 24%.13Internal Revenue Service. Topic No. 307, Backup Withholding It is not an extra tax; it is a prepayment you claim back as a credit when you file. A current W-9 on file prevents it.
If You Sell Before Maturity
Selling a bill on the secondary market changes the picture. Any gain up to the acquisition discount, meaning the portion of the face value you had not yet earned based on how long you held the bill, is taxed as ordinary income.7Office of the Law Revision Counsel. 26 USC 1271 – Treatment of Amounts Received on Retirement or Sale or Exchange of Debt Instruments Anything above that (which can happen if rates fall after you bought) is a short-term capital gain, because a bill held for a year or less produces only short-term results. The state and local exemption still applies to the interest portion.
T-Bills Inside an IRA or 401(k)
If the bill sits inside a traditional IRA, Roth IRA, or 401(k), maturity looks the same mechanically: the face value credits to the account’s cash position. Taxes, though, follow the account, not the bill. Traditional accounts defer everything until withdrawal, when it comes out as ordinary income; qualified Roth withdrawals are tax-free. The state and local exemption adds nothing inside these accounts, because the account’s own rules already govern.
When the Account Holder Dies
For TreasuryDirect holdings, the process depends on the size of the account and whether the estate is being formally administered:
- Formal estate administration: the legal representative opens a TreasuryDirect account in the estate’s name to receive the securities, and letters of appointment must be dated within one year of submission.
- Small estates of $100,000 or less with no formal administration: a voluntary representative can claim the securities without probate, following a priority order that starts with the surviving spouse.14eCFR. 31 CFR 363.44 – What Happens When a TreasuryDirect Account Owner Dies
- Estates over $100,000: formal administration is required if the total redemption value of Treasury securities and undelivered payments in the deceased’s account exceeds $100,000 as of the date of death.14eCFR. 31 CFR 363.44 – What Happens When a TreasuryDirect Account Owner Dies
For bills held at a brokerage, a Transfer on Death designation lets the named beneficiaries receive the account, including any matured proceeds in the settlement fund, without probate. Without a TOD on file, the broker will generally require a death certificate and estate documentation before releasing the money.