Adding savings bonds to your investment portfolio is a smart idea. Diversifying among different assets will protect your nest egg when the economy downturns. Diversification doesn’t mean having three different mutual funds.
It means putting your money into different asset classes like mutual funds, stocks, real estate, and other income-producing vehicles. This is where savings bonds can help.
Savers invested $601 million dollars in bonds last year. Some bond investors are finding that they are earning 4 and 5 percent on their savings. Try getting that from your local bank. Savers are getting a slight edge in yields with bonds vs. certificates of deposits.
Savings bonds come in two flavors. EE series bonds come with a fixed interest rate percentage and I series bonds come with a floating rate that changes with inflation every six months. You have to hold them for at least a year. You pay a penalty equal to three months of interest if you sell your bonds within five years of purchasing them. Bonds stop paying interest after 30 years.
Your Portfolio
Bonds are electronically sold through treasearydirect.gov. You can buy up to $10,000 per year and if you have a case of nostalgia you can get the old paper I bonds through your tax refund if you request it. There is a $5000 maximum on paper bonds.
EE bonds pay a whopping.01% yield (sounds like federal robbery), but if you hold them for 20 years you get a 3.5% guarantee catch-up rate. Still not appealing but this is a long-term strategy for building your nest egg. Waiting 20 years if you have the time should not be a problem.
I Bonds (my favorite flavor) and the most popular at this writing are paying 1.48% interest and that is competitive with most bank CDs. Consider CDs offer no protection from inflation, you have to pay taxes on the federal, state, and local levels. The income from savings bonds is tax-deferred and only paid at the federal level. Again this is a long-term wealth-building strategy.
Avoid These Four Pitfalls
If you have owned savings bonds for years be sure to figure out the value of each bond before you cash it in. Jackie Brahney of savingsbonds.com says you need to check these four pitfalls before you cash in:
Pitfall One – You cash in the oldest bonds first. They might be your highest earners.
Pitfall Two – Don’t go by face value when redeeming. Find out the true value of your bonds. Bonds with a face value of $5000 could be worth $ 10,000 and this could put you in a higher tax bracket.
Pitfall Three – You just pushed yourself into a higher tax bracket by cashing in so many bonds. The cumulative interest rates increase your income.
Pitfall Four – You redeem your bonds a day or week before the six-month interest payment is due to be paid.
Treasurydirect.com and savingsbond.com have free calculators you can use to determine the value of your bonds, brief your monthly on their worth, and how much interest has accumulated. Knowing your bonds can save money on taxes and increase your earnings.
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