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Comparing Savings Accounts and Savings Bonds

April 07, 2009

By Clark Schultz | Money Rates Columnist

Savings bonds were created during the administration of President Franklin D. Roosevelt to help finance government spending during the Depression and World War II. Buying savings bonds was considered patriotic, but in addition the bonds were also a safe investment backed by the Treasury Department. The savings bond program has remained in existence ever since World War II with the Series EE Bond and the Series I Bond now available for online purchase or paper purchase.

Savings bonds share some characteristics with bank savings accounts. Both are federally insured and protected against principal loss.  Interest rates are variable for both types of accounts. A bank can reset the rate on their savings account at anytime, while the Treasury Department resets rates on their newly issued savings bonds every six months on April 1 and November 1. Both savings bonds and savings account can be opened easily online with as little as $25.

There are also important differences between savings bonds and savings accounts. These include:

Penalties
Savings bonds cannot be redeemed for 5 years after the purchase date without incurring a penalty of 90 days of interest. Bank savings accounts can be liquidated at anytime without penalty.

 

Purchase Limit
The maximum allowed purchase amount of a savings bond per individual social security number is $10,000. A savings account at a bank, on the other hand, has no deposit limitation. The FDIC only provides insurance up to $250,000 per depositor, but does not limit deposit amounts. There are also some banks that are participating in a special FDIC guarantee program that does not limit the amount of deposit insurance, but that program only applies to non-interest bearing accounts.

 

Rates
Comparing rates on savings bonds and bank savings account is easy. The current rates for the Series I Bond and the Series EE Bond are listed at SavingsBonds.gov. The Series I Bond, commonly called the Inflation-Bond, pays a fixed component and also a variable component. The fixed component remains the same for the lifetime of the bond and the variable component is reset every six months based on the increase in inflation for the previous six months as measured by the Consumer Price Index. Until rates are reset on May 1, the Series I Bond is currently paying 5.64%. Because inflation was negative over the last six months, the new variable component for the next six months will be 0%. The Treasury Department is not expected to increase the fixed component high enough on May 1 to compensate for the negative inflation and will likely provide new buyers of the Series I Bond no interest at all for the next six months.  Even with negative inflation, called deflation, holders of the Series I bond will never lose money.

 

All Series EE Bonds issued after May 2005 pay a fixed rate set for life. The Treasury Department resets the rates every six months. If you buy a Series EE before May 1,2009, you will earn 1.30% for the lifetime of the bond, but buyers after May 1 may see a lower rate. The disadvantage to the Series EE bond is that you cannot redeem the bonds without penalty for five years, so if there are higher interest rates available you cannot switch your funds easily like you can with a bank savings account.

 

Which is Better?
If you want to set up some savings for your child or grandchild with an investment that offers safety, security, and a sense of history, there is nothing wrong with considering purchasing a U.S. savings Bond. However, a bank savings account can offer the same level of safety along with no penalties for early withdrawal and higher interest rates. In addition, a bank savings account does not have the deposit limitations. Compare the two types of investment carefully before locking-up your money in a savings bond.

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