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Payroll deductions for savings are a good idea

My company offers the opportunity to purchase U.S. savings bonds via payroll deductions. Are savings bonds a good vehicle for saving money?
Gwen

Dear Gwen,
U.S. savings bonds are the safest game in town. They're also excellent vehicles for saving money, especially when you buy them through a payroll savings plan. You pay yourself first -- and that's the best way to accumulate savings.

The two types of bonds offered by payroll savings plans are the Series EE and Series I. Here are the rates as of May 2005:

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For a future rate update, click the bond and it will take you to the U.S. Treasury Web site.

The Diva likes the Series I bond better than the Series EE bond. The I bond is the new kid on the block. Since its inception in 1998, it has consistently offered a higher rate of return than the EE, and this is unlikely to change. The two bonds share the following traits:

  • Rates change and interest compounds semiannually;
  • Interest is tax-deferred;
  • They earn interest for 30 years;
  • Buyers cannot redeem them for six months after purchase (unless there has been an natural disaster). The government, however, extended the minimum holding period to one year effective with bonds issued as of February 1, 2003;
  • They lose three months' interest if redeemed during first five years; and
  • Tax benefits when used for qualified education expenses.

The differences are not compelling enough to select the EE bond over the I bond, but if you'd like to see them, go to the U.S. Treasury's Web page "What's the Difference Between I Bonds and EE Bonds?"

What's so great about the Series I bonds?
Series I bonds offer a nice return, with virtually no risk. The average one-year certificate of deposit (CD) is paying 3.31 percent at this writing vs. the 4.8 percent you'll get with the Series I bond.

Even better, you don't pay tax on the I bond's interest until you redeem the bond, and you don't have to do that for 30 years. A CD's interest is taxed every year for as long as you own it. Even if the rates were the same, the I bond would win because your net worth grows faster with tax-deferred earnings.

For the latest on CD and money market rates, go to Bankrate.com's Savings and CDs page.

 
-- Updated: May 11, 2005
     

 

 
 
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