Bond with your nation, buy U.S.
If the terrorists thought their
actions would bring down America, they were sorely mistaken. Patriotism
and love of country have been renewed with vigor in the aftermath
of arguably the worst disaster in U.S. history.
Perhaps one of the finest ways to give back to our nation is to
invest in U.S. savings bonds. The money invested in savings bonds
directly helps finance our country's borrowing needs. They are a
low-tax investments, safe from the ups and downs of the stock market
and backed by the government.
But you have to think long-term -- really long-term
-- if you plan to purchase a savings bond, since bonds can take
as long as 30 years to grow.
Still, Americans purchased $6.4 billion in savings
bonds last year, despite the numbers that show we are spending more
than we save.
If you could profile the type of person who
buys savings bonds, financial planners say, it's someone who is
leery of investments such as stocks and mutual funds but is aiming
for a long-term goal such as retirement or paying for a child's
"For the long haul, a savings bond may
be the ideal choice because it's guaranteed to give the investor
significant growth," says Dino DeConcini, executive director
of the U.S. Treasury Department's savings bond marketing office
in Parkersburg, W.Va.
a tax-deferred savings account
Savings bonds essentially are government-insured savings accounts
with a fixed life span of 30 years. The interest rate paid varies
during the term and is compounded semiannually.
Savings bond rates are fairly competitive with
insured cash investments, such as certificates of deposit and money
market accounts. Right now, Series EE bonds pay 3.5 percent and
Series I pay 4.8 percent. That compares to Bankrate.com's national
average at this writing of 4.16 percent for 5-year CDs and top rate
of 2.1 percent for the best money market accounts.
While shoppers may be able to find better rates
at some banks, regular deposit accounts won't offer the tax advantages
of savings bonds. You don't pay any state or local taxes on the
interest the bonds earn, and federal taxes are deferred until you
cash them. That means all the interest paid on bonds compounds until
they are cashed, instead of being taxed each year.
The tax-free compounding means that a savings
bond earning the same rate as a bank savings account will yield
more money after taxes, especially in states with high income taxes.
Another tax option is that savers can hold the bonds until they
retire or move into a lower tax bracket, reducing the tax bite even
There's one other tax advantage that may prompt
investors to consider savings bonds: If the bonds are used for a
child's education, federal taxes can be reduced or eliminated altogether.
Since 1990, bonds purchased in the parent's name can be used tax-free
for the education of their children. The key here is that the bond
must be registered in the parent's name only. An additional strategy
can be to put bonds in the child's name. That exempts some of the
interest from federal taxes, while the rest is taxed at a lower
In addition to taxes, savings bonds have a few
other advantages over bank accounts. They can be replaced if lost,
stolen or destroyed, and can be purchased for as little as $25 apiece,
instead of the $1,000, $5,000 or even $10,000 minimum deposit many
high-yield CDs and money market accounts require. Finally, a saver
who maxed-out his Federal Deposit Insurance Corp. limits at the
bank could move money into savings bonds, ensuring that his money
would remain government insured.
to buy, but tough to track
Bonds can be purchased through most banks, savings and loans
and credit unions, or can be bought directly from the Federal
Reserve Bank that serves your area. You can now purchase savings
bonds online through the U.S.
Treasury Department's website.
Try to purchase bonds late in the month, advises
one group of experts, since the bonds earn interest from the first
of the month no matter what day you buy them.
The downside of purchasing saving bonds is the
low interest rate they carry, compared to stocks and other investments.
There also is a three-month interest penalty if the bond is cashed
before holding it for five years. And, because rates dip and soar,
it's tough to track your investment and predict your return.
There's confusion when it's time to cash bonds,
too. But, bondholders don't need to rush out and cash EE bonds the
minute they reach face value. In fact,
savings bonds continue to earn interest for 30 years after the purchase
date, even if the bonds have matured.
The date of maturity is when the bond reaches
the face value. For example, with a $500 Series EE bond purchased
for $250, the maturity date would be the day the bond reaches $500.
When's that? It's hard to say, since the rate can change every six
To help bondholders keep up, the federal government
developed the Savings Bond Wizard, which can tell you what your
bonds are worth. Download the free program from the Treasury
Department's Web site.
can be delayed -- but not avoided
Unlike a bank CD, a savings bond is not a fixed-term investment
you can set and forget. Bondholders should keep in mind that the
responsibility ultimately falls on them to act when their bond has
reached its final maturity at the end of 20 or 30 years. No notices
or statements are mailed by financial institutions or the U.S. Treasury.
The first consequence is that bonds will stop
earning interest whether they are cashed or not, leaving you with
an investment that pays 0 percent interest.
The second is, like death, taxes are inevitable
and savings bonds are no exception. And all that tax-deferred interest
you gained along the way? It gets taxed automatically in the year
the bond reaches final maturity, which can mean a substantial unexpected
tax bill. With mature Series EE bonds, you can no longer
roll them into HH bonds to extend the tax break; that option ended
on Sept. 1, 2004.