Remember savings bonds? Ask anybody who was around during or in the years right after World War II, and they’ll have fond memories of buying a savings bond for $25 for a child or grandchild, and five years later the bond would be worth $50. For people of a certain age, it was the first exposure to investing and compound interest—and today it’s a lesson in how high interest rates were back in the day.
Savings bonds are still with us, and people are still investing in them. The bonds are basically I.O.U.s from the government that pay interest, but the interest accrues inside the bond. That is, there are no coupon payments; you buy the bond and then redeem it at a higher value after five years.
There are two types that you can purchase:
• Series EE U.S. Savings Bonds grow at a fixed interest rate over the life of the bond, so you know, when you buy them, what you’ll get at redemption.
• Series I U.S. Savings Bonds pay a fixed interest rate plus another interest rate that reflects the rate of inflation—making them inflation-proof investments.
Both bonds are exempt from state and local taxes, and no federal taxes are due until the bonds are redeemed—which partly makes up for the lower rate the government pays on them. How low? Series EE bonds are currently paying about 0.4% a year, compounded quarterly. Series I Bonds are paying 2.52% a year—plus, as mentioned earlier, the inflation rate. This actually compares to the rates you can get on 5-year CDs. But remember: if you redeem savings bonds within the first five years, you will lose all the interest earned during the most recent three months.
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