Money Talks: Savings Bonds: An Old Recipe in a Bear Market

By: Stacy Johnson
By: Stacy Johnson

Investing is kind of like eating out. You've got to be careful about what you order. Stocks may be a bit spicy, a bank savings account too bland. Ready to sample something a little different?

You might want to have a new look at an old recipe: U.S. Savings Bonds. They're as safe as any bank because they're fully backed by Uncle Sam, and that's just one of the tasty ingredients of savings bonds.

Advantages of Savings Bonds

Besides being no-risk, U.S. Savings bonds:

  • Have no purchase fees
  • Can be bought in a few seconds over the Web
  • Have no state or local taxes on the interest
  • No federal taxes until you cash them in (and in some cases, like college, none at all)
  • Can be bought for as little as 25 bucks
  • Rates aren't too shabby, especially compared to bank savings and money market accounts

And if you're searching high and low but coming up empty for that one particular Spiderman toy, think bonds. Bonds as gifts come complete with customized and printable certificates.

Disadvantage: Wading Through Alphabet Soup

So savings bonds can be a good ingredient in your menu of investments. Only one drawback, you're going to have to wade through a bit of alphabet soup to understand the various types. You've got HH, EE and the newest, I Bonds. For our purposes here, we're talking only about the EE and I series.

The EE and the Series I are pretty much alike. They both:

  • Come due in 30 years
  • After six months, you can cash them in any time (but, during the first five years, you'll pay a three-month interest penalty
  • Pay no interest cash them in, which means you don't have to pay taxes until then

    So if these things are so alike, how are they different? Well, one difference is that EE's have a $25 purchase minimum and the purchase minimum for I's is $50. But the real difference is how Uncle Sam arrives at the interest he pays.

    EE's pay 90 percent of the average rate that five-year Treasuries have been paying for the prior six months. I's pay whatever the inflation rate is, plus two percent.

    Don't sweat which to buy too much--either will work just fine. Check the rates and decide.

    So, if you're waiting for that bull to tear down walls and gore the bear, then earning sure and safe money on your money doesn't get much better than this.

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