Updated: May 3, 2013 12:14PM
Originally published: July 5, 2001
If you’re a regular reader of this column, you may recognize that every year at this time I write about U.S. Savings Bonds. Not only is there a patriotic news peg with the July 4th holiday, but it serves as a reminder that in all types of markets--bull and bear--it makes sense to allocate a regular portion of your finances to some ‘’chicken money investments ‘’--money that you can’t afford to lose.
If you followed my suggestion last year, you would have earned 7.49 percent on Series I (inflation) Savings Bonds and 5.73 percent on the traditional Series EE bonds throughout the summer and into November.
But last Independence Day, most investors were still convinced they could earn double digits in the stock market every year. Still, some smart people recognized the savings bond advantage. Overall sales of savings bonds were up 35 percent from Oct. 1 2000 to May 30. And the higher-yielding I-bonds accounted for 49 percent of the total sold, up from 20 percent in the previous year.
Bond rates change every six months--May and November--so a full year of Fed rate cuts has had an impact on savings bond rates, as well. Currently, the Series I bonds yield 5.92 percent, and Series EE bonds pay only 4.50 percent.
Series EE Savings Bonds are purchased at a discount. That is, you pay half the face value when you purchase the bond. So a $50 bond will cost $25. The interest builds up along the way, until the bond reaches face value, or becomes worth even more than face value. You don’t pay any income taxes on the interest until you cash the bonds in. And then you pay only federal taxes on the accrued interest--savings bond interest is exempt from state taxes.
Parents or grandparents who give savings bonds, intending to use them for future college expenses, should be aware of the rules on the tax-free use of those bond proceeds for education. In effect, that means the savings bonds must be purchased in the name of the parent, not the child. The child may be named as a beneficiary on the bond, but may not be named as a co-owner.
The tax-free use of the proceeds for educational purposes applies only to middle-income filers--a definition that changes every year. For 2001, the full deduction of interest earned on savings bonds is available to those who have adjusted gross earnings of less than $55,750 on a single return, or $83,650 on a joint return. And the proceeds must be fully used for educational expenses such as tuition and fees (but not room and board) in the calender year the bonds are cashed in.Series EE vs Series I
Series I bonds provide extra inflation protection, because they have a fixed base rate that is set for the life of the bond. A new base rate is set for each new six-month period for newly issued bonds. Then on top of the base rate, there is a twice yearly inflation adjustment based on the current annual inflation rate. For newly issued Series I bonds, the current base rate is 3 percent, and with inflation running at 2.88 percent, plus some rounding in the calculations, the current yield on Series I bonds for this six-month period is 5.92 percent.How to buy savings bonds
About one-third of all savings bonds are sold through payroll deduction plans at work. And savings bonds are still sold at banks and financial institutions.
But the Savings Bond division of the U.S. Treasury is becoming increasingly Web-savvy. So for more information on how savings bonds work, go to www.savingsbonds.gov. There you can buy individual bonds using your Visa or Mastercard, set up an automatic monthly checking deduction to buy bonds on a regular basis, or even input a list of the bonds you own and instantly find out their current value.
Now let me end this column with the same closing paragraph I used last year. In retrospect, it certainly turned out to be the Savage Truth:
If you’ve read this far, don’t let anyone laugh at your conservative instincts. Sure, savings bonds aren’t likely to outstrip the gains you can make in a diversified portfolio of stocks, over the long run. But they can certainly let you sleep while the stock market takes some volatile swings in the short run. And that’s the Savage Truth.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at firstname.lastname@example.org. Her third book, The Savage Truth on Money,recently was published by John Wiley & Sons Inc.