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Savings Bond Investments: Know Your Limits

Barbara Marquand | guest writer for GoTalkMoney

An old standby for investors, savings bonds continue to provide good value today. But as with many good things, there are limits. The U.S. government caps annual savings bond purchases to $5,000.

If you're thinking the cap used to be higher, you're right. The U.S. Treasury lowered the cap to $5,000 from $30,000 at the end of 2007. The reduction was made "to refocus the savings bond program to its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest," the U.S. Treasury explained.

But because of the way the cap is applied, it's possible to invest as much as $20,000 a year in savings bonds.

How Limit on Savings Bond Investments Works

The cap is applied separately to the two types of savings bonds and to bonds issued in electronic and paper form. The Inflation Indexed bond, or I-bond, carries a fixed base rate plus a variable rate based on inflation, which is calculated twice a year, and the Series EE bonds earn a fixed rate set in May and November every year for new bonds issued. Interest accrues monthly and is compounded semi-annually for both types of bonds for 30 years.

Both bonds are sold in electronic and paper form, so if you buy I-bonds and EE bonds electronically and in paper, you can invest as much as $20,000 a year.

The limit is per person, so if your spouse does the same, then you could invest as much as $40,000 as a couple in savings bonds each year.

Disadvantages of Making Investments in Your Kids' Names

You can also invest in savings bonds under your children's Social Security numbers, but bonds in childrens' names aren't eligible for the tax-exempt savings program for education. To qualify for that program, you must meet certain income requirements, and the bond proceeds must be used for college tuition or fees for you, your spouse, or your kids. Your child can be listed as a beneficiary, but not as a co-owner of a bond for you to get the tax exemption.

Another downside is that savings in your children's names can make it more challenging for them to qualify for college financial aid, notes Forbes.com columnist Mel Lindauer, coauthor of "The Bogleheads' Guide to Investing."

Tax deferral is the obvious advantage of savings bonds over other safe, liquid investment vehicles, such as CDs, high-yield savings accounts and money market accounts, and they're a good, safe option if you're already investing the maximum amount in your retirement accounts.

Savings Rates on Savings Bonds

I bonds issued between now and May 1, 2010, have a 3.36 percent earnings rate, including a .30 percent fixed rate and a 3.06 percent inflation rate as measured by the Consumer Price Index. For Series EE bonds sold during the same period, you get a fixed rate of 1.2 percent. New rates are set every May and November.

You can buy savings bonds at most banks or online through the U.S. Treasury's Web site, and you can also purchase them with your tax refund by using the direct deposit feature and filling out IRS Form 8888.

If you're looking for short-term savings of less than five years, savings bonds aren't your best bet. Consider instead putting your money in a certificate of deposit, savings account or money market account. You have to hold savings bonds for at least a year, and you forfeit three months of interest if you cash them in before five years.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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