It’s come to this.
U.S. savings bonds — yeah, savings bonds — have become a better investment than most CDs.
Series I Bonds are paying 3.36%, which is more than the best, nationally available 6-month, 12-month, 24-month and even 36-month certificates of deposit.
Indeed, only a few top-paying 5-year CDs can beat that return.
Although the interest rate on Series I Bonds resets every six months to reflect the current rate of inflation, it’s hard to imagine the Consumer Price Index will decline anytime soon.
Although you can keep savings bonds for a long time, you don’t have to.
They can be cashed out after 12 months by paying a modest penalty of 3-months interest. After five years, there’s no redemption penalty.
Let’s say you only kept the bonds for 15 months. Your annualized return would still be 2.68%. You can’t earn anywhere close to that with the best 12- or 24-month CDs.
Savings bonds have several tax advantages over CDs, too:
- You don’t have to pay tax on the interest you earn until the bonds are redeemed. With CDs, you’re taxed on the interest in the year it’s earned.
- The interest earned on savings bonds is exempt from state and local income taxes. That’s a big plus for residents of states that levy a hefty tax on investment income, such as California and New York.
- The interest can even be exempt from federal income taxes if the bonds are used to pay for eligible college expenses. (See IRS Publication 970, Tax Benefits For Education.)
Unfortunately, the government will only allow you to invest $5,000 a year in a single type of bond, under a single Social Security number.
But it’s possible to buy $5,000 worth of I Bonds online, and another $5,000 worth of paper I Bonds, with a single Social Security number.
The easiest way to buy savings bonds is at TreasuryDirect and have them issued electronically to your account.
Paper bonds are still available at most banks.
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