For many people looking to maximize their savings, there has been a big interest recently in savings bonds. There’s a good reason for that interest: the Series I savings bonds are currently sitting at a 7 percent earnings interest rate. That’s noteworthy, because most of the time, Series I savings bonds stick closer to their guaranteed interest rate of 3.56 percent.
But before you do some online savings bonds shopping, there are some factors you should consider first:
What Are Savings Bonds?
Savings bonds are debt securities issued by the U.S. Department of the Treasury. They’re backed by the U.S. government, so they’re considered a generally low-risk investment.
The trouble with low-risk investments is that they can also come with a lower reward. With savings bonds, their rate of return is typically under 2 percent. Those rates change every six months, on Nov. 1 and May 1.
That’s why Series I savings bonds are getting extra attention right now: Until May 2022, the rate is at a rare 7.12 percent.
There are two kinds of savings bonds; Series I, and Series EE.
Series I Bonds are inflation-indexed. You can buy up to $10,000 worth of these bonds each year. I bonds have a fixed rate of interest, which is adjusted for inflation. You can redeem them any time, but if you cash them in within the first five years, you’ll lose the three most recent months’ interest. After five years, you won’t be penalized.
Series EE Bonds are an appreciating savings bond. They are like the Series I bonds in that you can buy up to $10,000 worth in a calendar year, and you’ll forfeit the three most recent months’ interest if you redeem them within the first five years. EE bonds can be exempt from federal income taxes if they’re used for qualified education expenses.
In both cases, your savings bonds are exempt from state and local income taxes, but not federal income taxes. Federal income taxes can be deferred until you redeem your money, or paid at final maturity, which is 30 years after the savings bonds were issued.
Should you invest in savings bonds?
Some people are rushing to buy the Series I savings bond while they’re at 7%, but should you do the same?
The short answer is: It depends.
One perk to investing in the Series I bonds right now is that it helps offset some of the losses from inflation. If you have your savings in a traditional savings account, then high inflation will likely eat up some of your potential earnings, because most savings vehicles do not adjust for inflation. Series I bonds can help temper some of those losses.
If we’re not in a period of high inflation, savings bonds are exactly what they seem: a safe, reliable savings option that’s not going to net you a high profit. With an EE bond, you know that your investment will have doubled in 20 years, and that can be somewhat reassuring for some investors.
Many people give savings bonds as gifts for young children for college or future expenses, but there are better options to do that. Friends and relatives can contribute to a 529 plan for college, for example.
But sometimes, like when inflation is high, bonds can help cushion the blow of the economic instability that could impact your portfolio. Just make sure they fit in with your overall investment plan and money goals before you purchase.
Downsides of savings bonds
If you’re thinking about buying savings bonds, there are some downsides to think about first:
- You can’t have savings bonds in a brokerage. You can only buy them through TreasuryDirect.gov. That means you have to keep track of them – and the password to your Treasury Direct – for decades (or until you cash them in.)
- The yearly limit can be small, depending on your overall portfolio. For some people, up to $10,000 per year in savings bonds isn’t worth the hassle when they could invest that money elsewhere. It depends on how much you’re looking to invest.
- There are usually better investment options to choose from. For example, if you’re considering buying savings bonds to help pay for education costs, a 529 plan typically has more to offer long-term.
Before you buy up bonds, just make sure you understand what the benefits and downsides are, and if they fit into the overall goals you have for your investments.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.
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