Savings Bond or Certificate of Deposit: Which Is Right For You?

Barbara Marquand | guest writer for GoTalkMoney

Both CDs and government savings bonds are safe, reliable investments and can be a part of a smart savings strategy. But which alternative is best?

Consider these five points when weighing whether to invest in a certificate of deposit or savings bond:

1. Your Savings Time Frame

Savings bonds are a good option for long-term goals, such as retirement or your children's or grandchildren's education. The bonds continue to earn interest for up to 30 years. Both savings bonds and CDs carry penalties if you cash them in early. Savings bonds must be held for at least a year, and you pay a 3-month earnings penalty if you cash them in before five years. CDs vary in terms, from one-month to several years or more. Choose a short-term CD if you think you might need the money in the next five years.

2. Interest Rates

Shop around for the best CD rates and compare them to those offered by savings bonds. There are two main types of savings bonds: 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. The Series EE savings bonds earn a fixed rate of interest, which is 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.

I bonds issued between now and May 1 have a 3.36 percent earnings rate, which includes a .30 percent fixed rate and a 3.06 percent inflation rate as measured by the Consumer Price Index. Series EE bonds sold during the same period have a fixed rate of 1.2 percent.

3. Investments: How Much is Available?

Savings bonds can be purchased for as little as $25, but you'll need to invest at least $1,000, if not thousands more, for high-yield CDs. Consider a savings bond if you have a small amount to invest and you have a long-term savings horizon. Savings bonds are also a good alternative if your bank deposits exceed the FDIC insurance limits, now set at $250,000 per person per financial institution. However, you can't purchase more than $5,000 of I or EE savings bonds in a calendar year.

4. Tax Advantages

Savings bonds offer tax advantages you don't get with CDs and money market accounts. You don't pay any state or local income tax on savings bonds, and federal tax is deferred until you cash the bonds. There are also tax benefits for using savings bonds for education, but there are income limits and some restrictions, so check with the IRS to see if you qualify.

5. Purchasing and Tracking Your Investments

Like CDs, you can purchase savings bonds from most banks or buy them online. Check with your employer, too; you might be able to purchase them through a payroll deduction. Go through the U.S. Treasury Web site to buy, manage, and redeem electronic bonds. (You can replace paper bonds or convert them to electronic savings bonds if they're lost or stolen.) For the first time ever, you can also buy I bonds with your federal tax refund using the direct deposit feature. Just include IRS Form 8888 and tell the IRS how much you want to invest in a savings bond.

Savings bonds are a bit tougher to track than your CD investments because the federal government doesn't send you regular statements. However, the U.S. Treasury's Web site does provide tools to track your bonds online.


U.S. Treasury • Introduction to Savings Bonds • http://www.ustreas.gov/offices/treasurer/savings-bonds.shtml
U.S. Treasury • Press Release: Series I to Earn 3.36%, Series EE to Earn 1.20% Fixed Rate, When Bought from November • • http://www.treasurydirect.gov/news/pressroom/currenteebondratespr.htm
Sandra BlockDon't get burned by tricky brokered CDs • Turning your tax refund into an I Bond may be a smooth move • • http://www.usatoday.com/money/perfi/columnist/block/2010-01-25-your-money-i-bonds_N.htm

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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