to your wealth: the good old savings bonds | Money
Since I started writing this column almost eighteen years ago, a lot has changed in the world, but believe it or not, my original post on US Savings Bonds is just as relevant. today than it was in 2003. Despite the hype for Bitcoin and other cryptocurrencies catching our attention today, I think savings bonds are worth revisiting for some. their unique properties (including a guarantee that the value will not drop).
Originally offered in the 1930s, U.S. Savings Bonds became even more popular during World War II to raise funds for the federal government. Fast forward almost a century to the latest iteration of savings bonds which are uniquely positioned to address some common concerns I see today.
One of these concerns is the fear of higher inflation. The interest rate on Series I Savings Bonds is specifically indexed to inflation so that the rate changes every six months based on the change in inflation over the previous six months. The rate is reset every November and May, which means the rate recently rose to 3.54%.
This rate is made up of two components, a fixed percentage which never changes during the life of the bond and the variable component which adjusts every six months according to inflation. Bonds bought today have a fixed component of 0%, so the total return of 3.54% is a function of inflation which will change again in November.
Another concern is the possibility of an increase in income taxes. Similar to other U.S. Treasury bonds, interest on savings bonds is tax exempt at the state level (which is especially useful in states with higher income taxes such as the Wisconsin with a maximum tax rate of 7.65%). Additionally, interest is not federally taxable until redeemed (unlike bank CDs which earn interest annually, regardless of the CD’s maturity date).