Savings bonds aren’t just for kids; they can provide anyone with a low risk investment alternative to savings accounts, CDs or high-yield checking accounts, and are less restrictive than you might think. Plus, they often pay higher interest rates than savings accounts and offer tax breaks.
Saving bonds accrue interest for up to 30 years, but you can actually sell them at any time (the only “catch” is that you forfeit 3 months of interest if you sell within the first 5 years). Savings bonds are also state tax free and federal tax deferred on interest gained, adding to their payout benefit.
Visit TreasuryDirect.gov to check out the latest interest rates on EE and I bonds. In addition, here’s some quick info on how these two types of bonds differ:
- EE bonds pay a fixed rate of return (for bonds purchased on or after 5/1/05) for the life of the bond so you can predict how much it will be worth at any point in the future. Bonds can either be bought electronically from TreasuryDirect.gov, or in paper form from a local bank. The fixed rate of return makes this a very dependable investment and easy to compare to other alternatives like CDs. As of October 2010 EE bonds pay a 1.4% rate of return, and you can buy up to $5,000 in a calendar year.
- I bonds are sold at face value, and like EE bonds can be bought in electronic or paper form. One key difference the interest rate. I bonds have a fixed interest rate to start (1.74% for the first six months, as of October 2010), but thereafter may fluctuate twice per year based on the inflation rate (if inflation goes up, the rate goes up, and vice versa).
In either case, it’s really not that much different than how savings accounts work. Your money is accruing interest so it will be worth more later than it was when you bought it. You can cash them out whenever you need the funds.
The benefit of deferring taxes paid on savings bonds interest allows you to be strategic about when you sell. This can be particularly beneficial to people who have income that fluctuates from year to year (and thus a fluctuating tax bracket). Wait for a year when you are in a lower tax bracket (for example, while you are in school, or have other tax credits to offset income) and cash out your savings bonds then to minimize your tax hit.
Consult a financial advisor to see if savings bonds are right for you. Read more at TreasuryDirect.gov.
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