Direct from the US Treasury

Continuing from our previous post about education savings and investment plans, why not mention another savings/investment option.

If you’re like most people, you have a certain amount of money as a “buffer” in your savings account.  You never use the money, but have it there just in case.  You earn modest interest on the money at a rate of 0.2% to 1.5%.  Now you could lock the money up in a Certificate of Deposit (CD) which would offer a couple percentage points return, but your money is locked up.

I was researching bonds as well as US Treasury securities.  You can buy US Treasury securities through a broker (why don’t they call them “richer”?  Why “broker”?  I’ll let you decide).  Anyway, I was learning more about US Treasury investment options and found that you can purchase these direct rather than through a middle-man and avoid any commission on the sale.

You can visit https://www.treasurydirect.gov and create an account.  You have the option in investing in various treasuries and bonds.

Treasury Bills -  These bills are sold at a discount and when the term (time period) is up, you’re paid the full amount.  Envision it as you pay $90 for a $100 bill that the government will give you in 52 weeks.

• Terms: 4, 13, 26, 52 weeks
• No interest payments made to you during the term.  The amount paid to you over your original purchase price is your interest gained.
• Minimum Purchase: $100.00
• Interest is exempt from State and Local Income Taxes
• Interest is subject to Federal Income Tax

Treasury Notes – The difference between the Note and the Bill is that the Note option will pay you interest every six months during the term.

• Earn a fixed rate of interest every six months
• Terms: 2, 3, 5, 7, 10 years
• Minimum Purchase: $100.00
• Interest is exempt from State and Local Income Taxes
• Interest is subject to Federal Income Tax

Treasury Bonds - Think of this as a long term note.

• Term: 30 years
• Pays a fixed interest every six months
• Minimum Purchase: $100.00
• Interest is exempt from State and Local Income Taxes
• Interest is subject to Federal Income Tax

Treasury Inflation Protected Securities (TIPS) – Think of these as Treasury Notes that adjust (in your favor) as inflation increases.  You receive interest payments on your principle investment, and the principle investment is increased based on inflation.

• Term: 5, 10, 20 years
• The principle can also decrease according to deflation; however, if you hold the investment to maturity, you’ll get back your principle regardless of the deflation.
• Interest payments are made twice a year based on the principle
• Minimum Purchase: $100.00
• Interest is exempt from State and Local Income Taxes
• Interest is subject to Federal Income Tax

EE / E Savings Bonds – Can make a good gift for the grandkids.

• Min Term: 1 year
• Earns interest for 30 years
• Minimum purchase $25.00
• Two types: Electronic (purchased at $25.00 and accrues interest) and Paper (purchased at $25 and matures to $50)
• No redemption penalty after 5 years
• Interest is accrued (i.e., you don’t receive the money earned until you redeem the bond)
• If used for education expenses could be Income Tax Free (check the tax code)

I Savings Bonds – Similar to the EE Savings Bond except the I Savings Bond will adjust in your favor if inflation increases.

• Interest is exempt from State and Local Income Taxes
• Interest is subject to Federal Income Tax

What are the return rates?

There are a few things to consider when comparing returns of these investment/savings options.  You won’t be taxed by your state on most of these securities.  You might want to compare these against what you could get from a savings account rather than the stock market (although, they may not look all that bad now). The risk of these investments  is low because the government isn’t going  to default.

With that in mind, for money that might have just been sitting around earning less than inflation, subject to Federal, State, and Local Taxes, US Treasuries aren’t a bad idea for a secure investment.  Bytheway, the interest rate stated in your bank account and what you think you might be earning can be different depending on your beginning and ending balances.

DISCLAIMER: Investments hold risk, etc., etc., etc., this information isn’t guaranteed to be accurate or complete. In other words, you’re responsible for your own financial decisions and shouldn’t rely on what is written here; don’t get mad or sue if things don’t go as you planned.

References:

Product in Depth (and sub headings). In  TreasuryDirect.gov. Retrieved July 14, 2009, from https://www.treasurydirect.gov/indiv/research/indepth/indepth.htm

Explaining Simple Interest, Compound Interest, APR, and APY. In  The Simple Dollar. Retrieved July 14, 2009, from http://www.thesimpledollar.com/2006/11/28/explaining-simple-interest-compound-interest-apr-and-apy/