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Are Series I Savings Bonds A Good Investment?

It doesn’t take a financial genius to notice that it’s tough being a responsible saver these days. Interest rates are low, and have been for a while, that it seems as though there isn’t much difference, outside of FDIC insurance, between opening a CD and stuffing the money in your mattress. The term high yield savings account [3] is comedic… since when was 1.11 of anything considered high?

There are, however, a few options out there for savers with more flexibility in their finances. While the national debt has seemed to take hold in our political discussions, it hasn’t been as prominent in our financial discussions. Treasury debt [4], such as bonds and bills, has never been a sexy pick for main street savers. It’s about time we gave them a serious look as an option and my favorite of the group is the Series I savings bond.

I won’t go into the nuts and bolts of the bond, you can read about that here [5] (note that the article is very old, so any figures are out of date but the mechanics are the same), but here are the reasons why I like it.

Attractive Interest Rates

Series I Bonds [6] currently yield 4.60% APY through October 31st, when the inflation portion of the interest rate will be adjusted based on the CPI-U. As you may remember, Series I bonds have a fixed rate and an inflation rate. The fixed rate is set for the life of the bond whereas the inflation portion will adjust based on actual official inflation rates (you can argue whether or not CPI-U is an accurate gauge of interest, but that’s a different discussion).

Compared to interest rates of comparable investments, like savings accounts and certificates of deposit, a 4.60% rate is spectacular. It’s comparable to current reward checking accounts [7], minus the hassle.

There is a downside to the rate. You cannot redeem your bond prior to one year and if you redeem it before five years, you surrender 3 months of actual interest (what you earned the preceding three months).

Low Entry Point

If you buy a paper bond, the minimum investment is $50 and the increments are in sizable steps ($50, $75, $100, $200, $500, $1,000, and $5,000). If you buy an electronic bond through Treasury Direct, you can start with as little as $25 and move in penny increments. I find that going through Treasury Direct, despite it’s somewhat antiquated security measures, is the best option

Favorable Tax Treatment

Unlike interest earned on deposit accounts, like savings accounts and CDs, interest from this Treasury bond is exempt from State or “political subdivision of a State” (counties, cities, etc.), with the exception of estate/inheritance taxes. So it is subject to federal income taxes [8], but not State and “smaller.” You can exclude these earnings from federal taxes if they are used to finance education.

Finally, there is a limit to how much you can purchase each calendar year, though that limit is fairly high for most savers. The limit is $5,000 in electronic bonds through Treasury Direct and $5,000 in paper bonds. If you do opt for paper bonds, I highly recommend converting them to electronic bonds [9] because it makes them easier to manage.

(Photo: karen_d [10])