To Your Wealth: Good old savings bonds

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Since I started writing this column almost eighteen years ago, a lot has changed in the world but believe it or not, my original article on U.S. savings bonds is just as relevant today as it was in 2003. Despite the hoopla for Bitcoin and other cryptocurrencies attracting our attention today, I think savings bonds are worth revisiting for some of their unique properties (including a guarantee the value won’t decline).

Originally offered in the 1930s, U.S. savings bonds became even more popular during World War II to raise money for the federal government. Fast forward almost a century to the latest iteration of savings bonds which are uniquely positioned to address some common concerns I see today.

One of these concerns is the fear of higher inflation. The Series I savings bond’s interest rate is specifically indexed to inflation such that the rate changes every six months based on the previous six month’s change in inflation. The rate is reset each November and May which means the rate recently changed to 3.54 percent.

This rate is comprised of two components, a fixed percentage which never changes for the life of the bond and the variable component which adjusts every six months based on inflation. Bonds bought today have a 0% fixed component so the entire 3.54 percent return is a function of inflation which will change again in November.

Another concern is the potential for higher income taxes. Similar to other U.S. Treasury bonds, the interest on savings bonds is tax-free at the state level (which is especially helpful in states with higher income taxes such as Wisconsin with a maximum income tax rate of 7.65 percent). In addition, the interest is not taxable at the federal level until they’re redeemed (unlike bank CDs which report interest each year, regardless of when the CD matures).

All the features, I’ve discussed relate to the Series I savings bond but there’s also Series EE which I don’t recommend as the current rate is only 0.10 percent (although this effectively increases to 3.53 percent but only if you keep the bond for 20 years when it’s guaranteed to double in value).

Buying savings bonds requires opening an account through Treasury Direct which can be done online at www.savingsbonds.gov. Purchases are limited to $10,000 per year with a couple of important disadvantages. First, new bonds cannot be redeemed in the first twelve months. Redemptions in the first five years are subject to a 3-month interest penalty. Also, during periods of low inflation, the interest rate can be really low (but fortunately never negative, even during periods of deflation). After 30 years, the bonds stop earning interest entirely.

I’m sure there will be new financial products in the next several decades vying for your attention and money but perhaps you’ll now reconsider plain, old savings bonds for achieving (gradual) financial success.

Justus Morgan is a fee-only financial planner with Financial Service Group Inc., a registered investment advisory firm at 4812 Northwestern Ave., online at www.ToYourWealth.com

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