US Savings Bonds are at a 25 year high. Are these a good alternative to stocks right now?

US Savings Bonds. If you were a kid in the 90s and you had parents that wanted to teach you about investing and interest rates, they probably took you down to the bank to buy some with your allowance or paper route money.

Or maybe you got one when you won the spelling bee at school. You probably thought it was pretty lame back then. Instead of a Nintendo game, you had a bond that you had to hold onto to cash in at some point in the future. With interest, but kids, and many adults today, demand instant gratification. And compounding interest is a force of nature, but it accumulates over time.

With the Federal Reserve Bank System keeping interest rates low, ostensibly to “stimulate” the economy, but really just continuing to “hit” a flatlined patient long after the doctors should have called the time, it’s time to consider income-based investments.

The stock market is down. It’s still massively overvalued. We’re back to valuations we haven’t seen since the 90s, and it’s taking lots of inflation to keep this show apparently on the road. It’s like Japan’s Lost Decade.

Your bank account probably isn’t paying anything right now, and if it is, it’s probably half a percent. But there’s an alternative that pays 7.12%, and the interest earned is immune from state and local income taxes.

The humble US Savings Bond, Series I.

The I is for Inflation. The bonds are indexed to inflation, and change rates every 6 months. They are currently paying 7.12%, and could go even higher soon.

Even if you cash them out after the 12 month minimum hold time and take a penalty of 3 months interest, it’s still better than a bank account.

Better yet, if you buy them at the end of the month, you only have to hold them for 11 months, yet you get paid 9 months interest if you were to cash them out after the 11 months, as they earn interest backdated to the first of the month in which they were issued.

You can buy these bonds if:

You are a US citizen, Green Card holder (Permanent Resident), or a “US Person” (basically a resident alien by the IRS Substantial Presence Test, which includes international students).

You have a Social Security number.

You have a US bank account with which to fund purchases and redeem bonds to.

To purchase these bonds, you can use Treasury Direct.

The Treasury Direct system is a little wonky, but straightforward.

You basically get an account number and set a password and a 2FA recovery email address (for one time codes).

Then you tell it your bank account routing and account numbers from where you want to buy and redeem bonds (you can add multiple accounts, as long as your name is on them).

Optional: Add your driver’s license/state ID number. (I emailed asking if this would affect buying or redeeming the bonds and was told by the Treasury that it does not. It just helps them verify your identity some more in case there are any questions.).

The wonkiest thing about the Treasury Direct site is the virtual keyboard.

To enter your password, there is a really strange virtual keyboard, and you use your mouse to click on the letters.

The Treasury says this is to avoid fraud involving keyboard emulators and malware (mainly a Windows problem….I am able to manage my Treasury account effectively from most browsers on Debian GNU/Linux).

In addition to the state and local tax exemption, Treasury Direct Savings Bonds have another perk.

While the Treasury site is a bit weird, it charges no commissions, as most trading platforms do. So you save some more money.

Limitations of Savings Bonds and Treasury Direct:

The Treasury will ONLY pay the bonds back to the person who bought them, and you cannot sell Savings Bonds to other investors, only back to the government.

There is a purchasing limit of $5,000 per year, per US person. Obviously, married couples can double this by each buying $5,000. You can use Payable On Death on the bond to leave it to your spouse (or anyone else)and put their Social Security Number on it, and this would avoid the probate process.

The interest earned on the bond is taxable, but only by the federal government. No state may tax it. And the federal government will waive the taxes on the bond interest under certain cases, such as if you pay for qualifying college tuition expenses with it. The tax is deferred, meaning that you owe taxes on the interest on the bonds you redeem for the tax year in which they are redeemed.

There is no requirement to pay tax on the interest until you redeem it, or until 30 years later when the bond makes its final interest payment.

In summary:

The stock market is in the toilet this year, and it didn’t manage to do much better than I series Savings Bonds last year. Even though these are a Savings investment, when they outperform the stock market, and with no risk to principle, it can be hard to argue with the logic of buying them,.

As you would normally have done with a CD, you can “stair step” your bonds so that you always have more coming available if you need the cash for something. Just stagger your purchases.

If something radically changes in the future and inflation falls back to lower than gains in the rest of the market, you can get your money back out with very little penalty. There is no interest penalty at all if the bonds are at least 5 years old.