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Bond with your nation, buy U.S. savings bonds

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 college education.

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"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.

Like 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'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 more.

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 "child's rate."

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.

Easy 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 months.

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.

Taxes 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.

-- Updated: May 9, 2005



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