While they make a nice gift, are savings bonds a good investment? Here are a few pros and cons:
- They are safe, insured by the full faith and credit of the U.S. government.
- They can be purchased directly from the government with no fees to a broker or an agent.
- You can invest for as little as $25.
- You can purchase them through some employer-sponsored plans.
- Interest is generally exempt from state income taxes. Federal income taxes can be deferred until the bonds are redeemed.
- If the bonds are used for higher-education expenses, some or all of the interest may be excluded from federal income taxes.
- They are relatively illiquid. Generally there are penalties for early redemption, so these are inappropriate investments for short-term needs. This is not a place for your emergency fund.
- You need to track when interest payments are posted. If you redeem a bond just prior to the next interest payment date, you will miss out on that interest.
- You have to redeem the bonds. Millions of dollars in old savings bonds are sitting in safety-deposit boxes gathering dust and have ceased to earn interest.
- Interest rates may or may not be competitive. At times, this can be a pro as well. You will need to look at the rates over time, because a component of the interest rate is variable.
Savings bonds have their place as a savings vehicle for many of us. Be sure to understand when they are appropriate and when there might be a better alternative.
Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments. Follow Roger on Twitter; connect with him on LinkedIn.