Today’s Hottest Investment: Savings Bonds?
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- By Casey Bond
- July 5, 2011
It may not be the stuff lively cocktail party banter is made of, but the often overlooked savings bond is making a name for itself as one of the best places to park your cash these days.
What’s not to love? Savings bonds stand as one of the safest investments you can choose, but currently offer rates that beat out high-interest savings accounts and long-term CDs by a long shot. Series I bonds, in particular, are capturing the attention of risk-averse investors across the U.S.
What is a Series I Bond?
In truth, it’s not really accurate to call a savings bond an “investment,” but rather more of a savings instrument. Still, they’re often a smart addition to your portfolio, especially if you’re turned off by high-risk investments like stocks.
There are a multitude of bond types, some of which are riskier than others. Series I bonds, however, are inflation-indexed bonds backed by the U.S. government. This means the money invested is loaned to the federal government, rather than a municipality or corporate entity, and the interest rate is calculated according to the rate of inflation. I-Bonds are guaranteed not to lose principal value as well.
Right now, the rate on a Series I savings bond is 4.60%. Compare this to the national average of less than .20% APY for a savings account and even 1.65% APY for a 5-year CD and easy to see why these bonds are such a big deal.
How Series I Savings Bond Rates are Calculated
The interest rate on a Series I-Bond is actually two rates:
- Fixed Rate: The fixed portion of the bond’s rate remains the same for its full duration. Currently, I-Bonds carry a fixed rate of a whopping 0.0% since interest rates are so low right now.
- Inflation-Adjusted Rate: Here’s the good news. The second component of the bond’s rate is determined by the present Consumer Price Index for Urban Consumers (CPI-U). Today, that’s 4.60%. The adjustable portion of the interest rate is recalculated every six months in May and November.
It’s important to know that while you’re protected against a loss as long as you hold the bond for at least a year, cashing in before 5 years will result in a penalty of 3 months’ interest.
Additional Benefits of Savings Bonds
Aside from the rate, there are a few other reasons why I-Bonds make a good investment:
- Taxes: I-Bonds aren’t subject to state or local taxes. Plus, if you use your bonds to pay for qualified educational expenses, you don’t have to pay any taxes on them at all (state or federal). You can also defer interest income taxes for up to 30 years with cash basis reporting and allow more money to compound.
- Low Minimum: You can buy bonds electronically for as little as $25. If you purchase paper bonds, the minimum is $50. You are, however, capped at $5,000 per year.
Are you going to get rich buying savings bonds? Absolutely not. You will, however, grow your money a lot faster than if you were to let it sit in a savings account. I-Bonds are a great way to save for a future expense like college or a house, all the while outpacing inflation and avoiding market risk.