savings

Savings bond offers inflation buffer

Don TaylorQuestionDear Dr. Don,
I have always bought Series EE savings bonds for my grandchildren. I usually purchase them in autumn to give as Christmas gifts and as part of their birthday gifts the following year.

Is this still a good idea? How much interest are they paying now? Is it really 1 percent or less? It is very disheartening. If the interest rate is very low, does it stay the same for the next 15 or 20 years or can it ramp up? Thank you for any info you can provide.
-- Brenda Bonds

AnswerDear Brenda,
Series EE savings bonds issued since May 2005 have offered a fixed rate that depends on the rate set when the bond was issued. Every May 1 and Nov. 1, the Bureau of the Public Debt announces the fixed rate for Series EE bonds purchased over the following six months. EE bonds issued from November 2010 to April 2011 will earn a rate of 0.6 percent.

What's interesting is that these bonds are required to double in value over a 20-year holding period. The EE bond fixed rate applies to a bond's 20-year original maturity. For a savings bond to double in value over 20 years, it has to earn an annual rate of about 3.5 percent. From the TreasuryDirect Web page "EE/E Bonds Rates & Terms:"

Interest Earning Life
At a minimum, the U.S. Treasury guarantees that an EE Bond's value will double after 20 years, its original maturity, and it will continue to earn the fixed rate unless a new rate or rate structure is announced. If a bond does not double in value as the result of applying the fixed rate for 20 years, the U.S. Treasury will make a one-time adjustment at original maturity to make up the difference. Series EE bonds earn interest for 30 years.

So if the grandkids can wait until the bonds turn 20, they earn about 3.5 percent. Cash in early and they get the lower fixed rate.

Series I savings bonds don't have the "double your money in 20 years" provision, and current inflation rates are relatively low. But I'd still recommend them over the Series EE savings bonds to guarantee returns keep pace with future inflation, especially if you don't expect the kids to hold on to the bonds for 20 years.

The Series I savings bonds have two interest components: a fixed rate set at the time of purchase and a variable rate that changes every six months and is based on the inflation rate as measured by the Consumer Price Index, or CPI. Learn more about the two bonds on the TreasuryDirect Web page "I and EE Savings Bond Comparison."

There are some tax considerations. It could be better for the grandkids to pay taxes in the year earned versus deferring taxes until the bonds are redeemed or matured. Alternately, putting the bonds in the parent's name may allow the bonds to be redeemed tax-free when used for the children's qualified education expenses.

The TreasuryDirect Web page "Series EE/E Savings Bonds Tax Considerations" has more information about these choices.

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