Conservative investors often invest in savings accounts or U.S. savings bonds. You have a number of choices for savings accounts, including banks, credit unions and even online institutions. For savings bonds, you can choose either series EE bonds or inflation-protected series I bonds. The relative advantages of savings accounts or bonds depend both on your preferences and on changes in the markets.
Size of Investment
Savings accounts have the advantage for balance requirements. You can open savings accounts at many institutions with sums as small as $1. However, some banks charge a fee if you do not maintain a minimum balance of $100 or more. Although banks do not normally limit your deposit, large accounts can exceed government insurance limits. You can purchase savings bonds with as little as $25. However, the bonds have an annual purchase limit of $5,000 in electronic and $5,000 in paper bonds of each series per Social Security number. The Treasury will not sell paper bonds at banks beginning in January 2012.
The relatively low interest on savings accounts is often a disadvantage compared to bonds, and also compared to other savings vehicles such as certificates of deposit. However, your return on bonds depends upon the bond series, the time of purchase and the current interest rates. An I bond combines a fixed interest rate depending on your purchase date with a variable inflation adjustment. In some cases, total I bond interest falls to 0 percent. The rate on an EE bond changes twice a year. However, if you keep an EE bond for 20 years, the Treasury bumps up its value to double the cost, a return of approximately 3.5 percent.
Savings accounts give you quicker access to your money than savings bonds. You normally can get your money out of a savings account within 24 hours. However, the Treasury requires you to wait a minimum of one year before cashing in an EE or I savings bond. If you cash the bond before five years, you must also pay a penalty of three months' interest. If you redeem electronic bonds online, the government will transfer your money to your bank account within one business day. If you have paper EE or I bonds, you can only cash $1,000 worth at a financial institution at one time. For larger amounts, you must mail the bonds with a signed request to a Treasury Retail Securities Site.
If you put your savings in an insured institution and stay within limits, savings accounts and savings bonds are equally safe, and safer than other investments such as stock mutual funds. The Federal Deposit Insurance Corp., or FDIC, insures bank savings accounts, while the National Credit Union Administration (NCUA) does the same for credit union share accounts. The insurance limit in each case is $250,000 per savings institution for each single account-holder. If you want to insure more than $250,000 you need to open different types of accounts, such as joint or retirement accounts, or use a completely different savings institution. The federal government guarantees your savings bond investment without limits.
Savings accounts have fewer tax advantages than government savings bonds. Unless you open a savings account with tax advantages, such as an IRA account, you must pay full taxes on the interest. Savings bonds allow you to postpone paying taxes on the interest until the bonds mature and are never subject to state or local income taxes.
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