When I was younger, one of the wealthier businessmen in her small town me a small savings bond as a gifts to use for my college education. When age 18 came around, there was barely enough money in there to purchase one text book. Then I got to thinking, is it really ever a good idea to get a savings bond? Is there any case that it makes sense to get a savings bond versus another sort of savings investment?

For the uninitiated, a savings bond is basically an investment in government debt. You can go over to the IRS’s website and purchase an electronic bond for any value amount over $25.00. The current rate for EE savings bonds is 1.40%. You cannot cash in the bond for a period of less than one year, and if you cash it in before five years, there’s a penalty of 3 months interest. There are other types of bonds with slightly different features and rates, but for the purposes of this article, we’ll talk about EE bonds, which are the commonly purchased by individuals.

There are some tax benefits to federal treasury bonds that should be considered as well. The interest that you earn on savings bonds are exempt from state and local taxes, which is nice. Even with this, you’re still better off to get a certificate of deposit or a high-yield money market savings account that offers around 3% and to just pay the state taxes on it. In my case it doesn’t really matter because there are no state capital gains or income taxes in South Dakota.

In addition, you can make the interest tax exempt if you use the money for education. This is a nice perk, but there are so many better educational savings plans around. Your best bet is to use an educational savings account (ESA), so that you can invest in some solid mutual funds which will average closer to 10%, and still not pay any taxes on the money if its used for educational purchases.

The tax benefits aren’t reason enough to get a treasury bond, but the primary reason to not get them is because the interest rates aren’t competitive. The fixed rate EE bond goes for 1.40% right now, and you can get a good certificate of deposit for around 3.5%. The variable rate bond, the I bond goes for about 2.4% right now, which is even beat by a nearly all of the high-yield money market accounts.

There’s also the problem of liquidity. You can’t cash these in for under one year, and there’s an interest penalty for cashing them out under five years. These aren’t exactly the best term, you could put the money in a high-yield savings account instead and get all of the same interest and more, as well as having your money wholly liquid.

People also have a tendency to lose savings bonds. A lot of people aren’t very organized in their financial lives and just happen to misplace savings bonds they get as gifts and never think about it again. Decades later one of their children will happen to find it once again long after it could have been used for its intended purpose.

Savings bonds are often used as gifts for another. When you give someone cash, they’ll spend it and not think anything of it. Savings bonds are a bit less liquid, so it’s like you are helping them build wealth. If you want to do this, consider giving them a certificate of deposit or high-yield savings account in their name. This way the money will be more flexible, still be a financial gift that isn’t exactly cash, and will make the recipient more money.

When it comes to you and I as individuals, there really aren’t any good situations where it’s smart to get a savings bond. There are better rates found elsewhere, savings bonds are very illiquid, and the tax benefits don’t really pan out and there are better options for financial gifts available.

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This entry was posted on Saturday, August 16th, 2008 at 2:28 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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