Are savings bonds good investments?
Randy Myers
Few investments are less sexy than U.S. Savings Bonds. Sure, they outperform a passbook savings account, but you’ll seldom hear anybody bragging about how they made a killing in Savings Bonds. It simply can’t be done.
Yet Savings Bonds remain pervasive in our society. More than 55 million Americans, or approximately one of every five, own them. The question is, should they?
For anyone with a long-term investment goal, Savings Bonds may have little appeal because they greatly underperform other readily available investments, such as stocks and many mutual funds.
Investors purchase Savings Bonds, often through workplace payroll savings plans, at half their face value. Those issued since 1965 earn interest for 30 years, although most reach face value in less than half that time. For example, bonds issued today pay interest at a variable rate equal to 90 percent of the average rate on five-year Treasury notes, currently 5.68 percent. If that rate were to stay unchanged, today’s bonds would reach face value in about 12 years.
Those who have invested in stocks, however, have fared better. From 1926 through 1996, for example, the Standard & Poor’s 500-stock index earned an average of 10.7 percent annually, according to Ibbotson Associates, a Chicago-based research firm. Since 1976, it has earned an average of 15 percent annually.
Still, U.S. Savings Bonds do have appeal for some investors, particularly those whose foremost concern is protecting their principal. Savings Bonds are safe, since they’re backed by the full faith and credit of the U.S. government. They’re also free of state and local income taxes, and they allow for deferral of federal income taxes until the bonds are redeemed.
Also, interest on bonds purchased since Jan. 1. 1990. may be free of federal income taxes if a parent uses his or her bonds to fund a child’s college tuition, provided the family’s taxable income is below an inflation-indexed maximum. This year, full deductibility ends when income reaches $76,250 for a married couple filing a joint return, and it phases out completely at $106,250.
Getting Started
Let’s suppose that you like the safety or the tax benefits that Savings Bonds offer, or that your parents insist on buying bonds for your children each year, and you need to make intelligent decisions about how long to keep the bonds. How can you manage your bond portfolio for maximum profits?
Until recently, it hasn’t been easy. The government doesn’t issue monthly statements telling us what our bonds currently are worth, their yield since purchase, or their current interest rate. (For the current rate, call the U.S. Savings Bonds Information Line, 1-800-487-2663.)
The Search For Facts
Getting your hands on the information needed to determine such things as the value and yield of a Savings Bond can be difficult. One way to obtain such details is to call any of the five Federal Reserve banks that serve as Savings Bond centers. The banks that do so are in Buffalo, N.Y; Kansas City, Mo.; Minneapolis; Pittsburgh; and Richmond, Va.
An easier solution — if you own a personal computer — is to buy a copy of the U.S. Savings Bond Consultant ($59.95), a relatively new software program distributed through Union Information Services Inc. in Wall, N.J. (1-800-717-2663). This program can tell you (as it told me) almost everything you could possibly hope to know about your bonds, including their current value (which may exceed the face value), the interest rate that has produced the bond’s earnings to date, the current interest rate, the date when the bonds stop earning interest, and the date of the next interest posting.
The U.S. Treasury Department, which oversees the Savings Bond program, offers the Savings Bond Wizard — free software that is similar to, though more limited than, the U.S. Savings Bond Consultant. Savings Bond Wizard provides current values and current yields for bonds as well as other information. The program can be downloaded at Treasury’s World Wide Web site, www.publicdebt. treas.gov.
Managing The Portfolio
Here are more tips for using Savings Bonds smartly:
* If your child owns Savings Bonds, file a federal tax return for him or her and declare the interest earned on the bonds annually As long as the child’s annual income remains below $650 per year, he or she will owe no taxes on the bond interest. And when they’re older and the bonds have matured, they won’t owe any federal income tax on them.
* Cash in your Savings Bonds once they reach final maturity; they won’t earn interest thereafter. Maturity dates are 30 years from date of issuance for all but Series E bonds issued before December 1965, which have a 40-year life.
You may not get rich by investing in U.S. Savings Bonds, but you won’t go broke, either. By understanding how they work, you can use them to your maximum advantage.
COPYRIGHT 1997 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group
