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With savings accounts and certificates of deposits paying extremely low interest rates in recent years; Time to consider putting money in US savings bonds?
Depending on your age, you may remember years ago when many employers offered an automatic payroll deduction for accumulating bonuses. You could even have walked into your local bank or savings and loan branch and bought the bonds.
Today it is quite different, purchases are made directly to the US Treasury, either online or through the postal service. The amount per year you can buy has also changed from $ 15,000 per taxpayer’s social security number to $ 5,000 today.
However, you can purchase both a bond online (electronic version) and the typical old paper bond, so the annual total is $ 10,000 annually. Since the annual total is based on each individual’s social security number, a married couple could buy $ 10,000 each year.
Advantages of US Savings Bonds:
- Tax deferred, you only pay income tax when you redeem the bonds.
- Small denominations, you can buy in quantities of $ 25 or more.
- Better interest rates than most savings accounts or money market funds.
- Tax free under certain circumstances depending on family income and if used for education.
- Exempt from state and local income taxes.
There are currently two types of savings bonds that you can buy, the (I) bond or EE. Forget about EE bonds as they hold a fixed rate for thirty years, with today’s low rates it is not worth the low yield of the investment. However, the bond (I) adjusts its interest rate every six months and will continue to increase interest for up to thirty years.
Note that all bonds purchased recently or in the past stop earning interest after thirty years. So if you have old savings bonds that are over 30 years old, you need to redeem them and reinvest them elsewhere or in a newer bond.
Bonds Amortization:
You must keep the bonds for at least twelve months, and if you redeem them before five years, you will lose the last quarter of accrued interest.
Over the past five years or so (I), bonds have performed better on interest than many other liquid investments, including savings accounts, certificates of deposit, and mutual funds. The current six-month yield is 4.60 percent as of September 2011. The bond is also adjusted twice a year, that is, May and November. The six-month yield is calculated based on a fixed rate of return and a variable semi-annual inflation rate.
To summarize, if you are not satisfied with what your bank or money market fund offers, consider a US Savings Bond as an alternative.