How Uncle Sam's savings bonds compare to today's highest cd rates

by Jim Sloan

When even the best savings account or certificate of deposit is paying less than 2 percent interest rate, U.S. savings bonds suddenly start looking like appealing investments.

Rising prices for gas and food have driven up the interest rate for Series I Savings Bonds to 2.3 percent for six months. If you buy a Series I bond between May and October, you could see a 4.6 percent return in a year. That's not bad when you compare them to savings account rates or the best 1-year CD rates.

Series I bonds are a combination of a fixed rate and variable rate based on inflation. Although the fixed rate is currently set at zero, the variable rate, which is based on the Consumer Price Index for all Urban Consumers, is 2.3 percent because of rising gas prices and burgeoning grocery bills.

According to the Fort Worth Star-Telegram, that potential 4.6 percent interest rate makes Series I bonds better investments than money market accounts, a high interest savings account or the best one-year cd rates, which is paying just 1.4 percent.

How to buy a bond

You can buy savings bonds at your bank or online at the U.S. Treasury's TreasuryDirect website. There are four primary restrictions:

  1. You cannot purchase a bond with a credit card.
  2. You must be at least 18 years old to set up an online account and purchase a bond.
  3. You can purchase up to $5,000 in Series I bonds through a bank or other financial institution, starting as low as $50.
  4. You can buy $5,000 more online, starting with at least a $25 bond. You can buy an equal amount for your spouse or in the name of a child or grandchild.

Other advantages of the bonds

In addition to paying a relatively high interest rate, the interest you earn on a Series I bond is tax free provided you spend it on college tuition or fees for yourself, your spouse or a dependent. That tax exemption doesn't apply to unmarried individuals with a modified adjusted gross income between $71,100 and $86,100 or to married couples filing jointly with income between $106,650 and $136,650.

According to the Wall Street Journal, you can redeem your Series I bond any time after 12 months. But you will likely pay a penalty equal to three months worth interest for redeeming the bond before five years is up.

Although bonds are not as exciting as some investments, they are a safe bet; the bonds are backed by the government, so you know your money is safe. Also, the interest earned from Series I bonds are exempt from state and local income taxes. Interest accrues every month and is compounded every six months.

Other types of bonds

Another type of bond being touted recently by the Wall Street Journal is the Series EE bond. They earn a lower fixed annual interest rate of 1.1 percent for up to 30 years, but if you can hold on to it for a full 20 years, the government guarantees to double your money. That amounts to a 3.53 annual interest rate over 20 years. Otherwise, the penalties for redeeming before five years is the same as the Series I bonds.

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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