Savings Bonds vs. Bank Savings Accounts

(In this post, I’m not going to provide all the background information on savings bonds that I normally do. For that, please read the older posts in my Savings Bonds category.)

When the Treasury announced the $10,000 purchase limit for 2012, a few readers asked if you should buy savings bonds in January, or wait until later in the year. Since then, a few things have happened. For one, the Federal Reserve has basically said that they will keep their target fed funds rates at zero until late 2014, while setting a target inflation rate at 2% annually. Translation: Interest rates on savings accounts and similar products will be remain crap while the things we buy get more expensive.

Also, we have another month’s worth of Consumer Price Index (CPI) data which is how the inflation rate is defined for savings bonds. The next 6-month variable rate update will be based on the CPI-U change between September 2011 and March 2012. We are halfway there:

Sep 2011 226.889
Oct 2011 226.421
Nov 2011 226.230
Dec 2011 225.672
Jan 2012 ?
Feb 2012 ?
Mar 2012 ?

You can see that inflation is actually negative over these three months. However, user MoneyOCD of Bogleheads posted this informational chart showing that in recent years there have been many periods of negative inflation from September to December, only to be followed by periods of higher inflation from December to March.

Basically, making predictions now is premature. If you buy in January through April, you will get a fixed rate of 0%, and a variable rate of 3.06% for six months. Given the interest rate environment, this is pretty much one of the best options for “safe” money. If you wait all the way until May, you’ll get something new based on whatever happens to inflation the next few months along with a fixed rate that will most likely be zero again. The inflation rate resets every 6 months based on your purchase month.

In general, if you have the money and are looking to put it in shorter-term, low risk investments that are guaranteed not to lose money (in terms of face value), I would be maxing out my limit on savings bonds for 2012. Keep in mind that savings bonds can’t be cashed in for an entire year after purchase. My personal opinion on the short-term? I don’t see any benefit in waiting until May. If you have money to put aside now, buy Series I savings bonds now. If you don’t, just wait until you do. The rate is already higher than savings accounts or 1-year CDs, and by waiting around in a 0.75% savings account or 1-year CD you’ll be missing out in interest.

If you’re looking to buy in January, I’d put in your order today at TreasuryDirect. It’s better to buy near the end of the month, as you get credit for the entire month no matter if you buy at the beginning or the end.

TreasuryDirect Electronic Savings Bond Purchase Limit Now $10,000 Annually

The Treasury announced today 1/4 that the annual purchase limit for electronic U.S. savings bonds bought at TreasuryDirect is now $10,000 per series, per person. I’m not sure why they waited so long to decide this, given that it’s been six months since they announced that they would will no longer sell paper U.S. savings bonds through banks and other financial institutions in 2012. Thanks to reader JR for the heads up.

Under the new rules, an individual can buy a maximum of $10,000 worth of electronic savings bonds of each series in a single calendar year, or a total of $20,000. Since 2008, investors could buy a maximum of $5,000 in each series and in each form (paper or electronic). So a single owner could buy $20,000 in one year. As of January 1, 2012, paper bonds are no longer being sold through financial institutions. With today’s announcement, the total amount an individual can purchase in online savings bonds in one calendar year is $20,000. An investor still can purchase up to $5,000 annually in Series I paper savings bonds using his/her tax refund and IRS Form 8888.

This also means that you could theoretically buy $10,000 electronically and $5,000 in paper bonds in 2012. However, another weird glitch on IRS Form 8888 [pdf] is per the directions, the total amount bought on that form cannot exceed $5,000 – whether you file single or married filing jointly. So a married filing joint couple can only buy $5k between the both of them, while two single filers can get $5k each. Boo.

The Finance Buff has a nice post about what he calls the backdoor to paper savings bonds regarding overpaying your taxes on purpose. Basically, you do your taxes, then file an extension with payment included in order to make sure you have a $5k refund amount, and shortly afterward file your taxes. Supposedly tax software like TurboTax supports Form 8888, so it’s not even necessary to file using paper forms.

Treasury Direct Review: Electronic Savings Bond Security Concerns

Despite the Treasury’s obvious dislike for the small investor, Series I Savings Bonds still offer a relatively good interest rate. As of January 1st, 2012, you will no longer be able to buy paper savings bonds other than a small window using your tax refund. The only option left is buying electronic savings bonds via This brings me to the following reader question:

Was just reading Mel Lindauer’s comments in the Bogleheads forum about I-Bonds and the trouble with Treasury Direct. Seems a great many folks hate the system to the point that they would rather not use it. 2012 is/was to be the year that I first began purchased I-Bonds, having finally got to the point of maxing out all other tax deferred and tax free methods. Now I am not so sure…what is your experience with TD?

First, let’s get to what I see as the main reason why most people choose not to use the online service at TreasuryDirect (TD). TD is not a bank and does not fall under Regulation E and the Electronic Fund Transfer Act that establishes consumer protections for loss or theft of money from your account.

If your paper savings bonds are stolen or lost, the Treasury has a process in place to reclaim your bonds. However, if somehow your electronic savings bonds were stolen, you would stuck with the loss with no liability from TD. It doesn’t seem to make sense, but it’s true.

So what do you do? The easiest thing to do is not use TreasuryDirect. But it remains a good investment, so in my case I looked into what security measures were in place to prevent such theft. In November 2011, TD instituted some security changes to their login process. What would a thief have to do in order to cash in your savings bonds?

  1. They need your account number, which is more like Z-12345678 as opposed to johnsmith.
  2. When you login with a new computer, a one-time passcode will be sent to your e-mail address. So, they would need to have access to your e-mail address as well. You can choose to register your computer for future visits if you like, but it would seem safer not to do so. I don’t log into TD very often so my cookie expires anyway by the time I log in again. This means a unique code is sent every single time I log in.
  3. They would also need your account password. I would hope your e-mail password and your TreasuryDirect password are different. In any case, it’s harder for viruses or keylogger programs to record your password because you must enter it using a virtual keyboard (unless you circumvent it by disabling Javascript).
  4. Now, at this point they have online access to your account and can see your balances. But to cash out a bond, first you must answer a security question (mom’s maiden name, etc.). More importantly, you can only cash out a bond to a linked bank account. So the thief would need access to your bank account (…which is protected by Regulation E mentioned above!)
  5. Alternately, they would need to send in a paper form adding an alternate bank account under their control. However, the name on the bank account must match the name on the TD account, and the form requires a Medallion Signature Guarantee where a third party checks official ID for identity verification. The TD website itself has improved over the years so that any small change (bank addition, profile change) results in a e-mail notice.

Personally, I deemed it exceedingly unlikely for an actual theft to occur and made the decision to go ahead and use the website. My holdings there are significant, but under 5% of total net worth. I know that others have also had technical issues with accessing their account, but I have not experienced anything like that. In the end, TreasuryDirect definitely has its flaws, and I would not fault someone for not using it as a result. You have to weight the risks and benefits for yourself. Security Login Changes 2011 is the official US Treasury website that allows individuals to directly buy securities online, including savings bonds and Treasury bonds. The problem is that they don’t want to take any responsibility for unauthorized access to your account, including reported fraud and theft, which actually makes them less consumer-friendly than even those evil megabanks. In the past, they figured the problem would be best solved with a series of clunky security measures.

I’m not sure why, but they have now streamlined the login process to be more similar to banking industry standards. On November 6th, they sent out the following e-mail to account holders:

TreasuryDirect has completed its security upgrades. Now, it is not necessary to use an access card to log into your account. When you log into your account, you will receive an e-mail containing a one-time passcode and the opportunity to register your computer. Also, for your added security, you will select a personalized image and verify your contact information.

The website was subsequently slammed and completely unusable all day. Always fun to spend the day wondering if your money is still there. 🙂 Today, I was able to log into my account and check out the new process. As mentioned in the e-mail, here are the new layers of security:

  • You must enter your account number, no usernames. So it’s still W-123-456-789, instead of something you would use across multiple websites like “johndoe90210”.
  • If your computer is not recognized, a one-time passcode is sent to the e-mail address on file, valid for only 2 hours. You must enter this passcode to go further, and you can set a cookie to remember your computer and skip this step in the future. For some reason, the cookie didn’t work for me, I always have to go the passcode route. (screenshot)
  • You must set a personalized image and caption text. This is standard procedure amongst banks now to prove that you are on the valid TreasuryDirect site and not a fake spoofing website.
  • Finally, you must enter your account password by clicking keys on a virtual keyboard. This is to counteract keyloggers. As before, You can use a physical keyboard simply by disabling javascript.

I see this as an improvement in accessibility, although probably a slight decrease in security. I’m okay with it; I can finally shred my secret decoder ring access card!

Savings I Bonds September 2011 Update: 3.06% For Next 6 Months

New inflation numbers are out for September 2011, so it’s time for the usual semi-annual update.

New Inflation Rate. March 2011 CPI-U was 223.467. September 2011 CPI-U was 226.889, for a semi-annual increase of 1.53%. (CPI-U increased 3.9% over last 12 months.) Using the official formula, the variable interest rate for the next 6 months will be approximately 3.06%, depending on the upcoming fixed rate announcement.

Purchase and Redemption Timing Tips. You can’t redeem savings bonds until after 12 months, and any redemptions within 5 years incur a interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month. It’s best to give yourself a little buffer time though, since if you wait too long your effective purchase date may be bumped into the next month.

Buying in October. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.0%. You will be guaranteed an variable interest rate of 4.60% for the next 6 months, for a total rate of 0 + 4.60% = 4.60%. For the 6 months after that, the total rate will be 0.0 + 3.06 = 3.06%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy at the end of October 2011 and sell at the beginning of October 2012, you’ll earn a 3.34% annualized return for an 11-month holding period, although you may want to hold it longer as new interest rates are announced. This is much better than any 1-year FDIC-insured bank CD available right now, keeping in mind the liquidity and purchase limits.

Buying in November. If you wait until November 1st, you will get a new unknown fixed rate + ~3.06% for the first 6 months, and an unknown rate based on ongoing inflation after that. Based on the current market rates of Treasury Inflation-Protected Securities (TIPS), in my opinion it is very likely that the new fixed rate will remain zero. A lot of uncertainty with this route.

Existing I-Bonds? If you have an existing I-Bond, the rates reset every 6 months (depending on your purchase month). Your monthly rate = your specific fixed rate + variable rate. Even at a low fixed rate, your existing savings bonds are paying much more than current savings accounts, so be very sure if you wish to redeem them.

Beware Low Purchase Limits. The annual purchase limit is $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number for 2011. For a couple, that’s a $20,000 total cap per year. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number

Buy online at As for paper, here is a post on how to buy paper savings bonds from your local bank. Paper bonds will be ended in 2012, except through a small window by overpaying your taxes on purpose.

With the interest rate calculations above, we find that savings bonds still pay much more interest than equivalent bank CDs with the same low risk. Also, interest on savings bonds is not subject to state income taxes as well as other unique tax advantages. I’m buying up to our limits and keeping all of my existing bonds for the foreseeable future. For more background, please see the rest of my posts on savings bonds.

U.S. Savings Bonds Have Outperformed Stocks Since 1998?

A reader recently told me that he was no longer investing in the stock market after seeing the chart below from the Savings Bond Advisor. It shows the total portfolio value after investing equal monthly amounts in either the S&P 500 stock market index or Series I US Savings Bonds. The time period is from September 1998 (when “I Bonds” started being sold) through August 1, 2011. My comments follow.

The past returns of savings bonds are indeed pretty good, but not likely to be repeated. Series I Savings Bonds (I Bonds) were the new thing in 1998, and the government offered some really enticing interest rates on them. I Bonds have a fixed component that lasts for the duration of that specific bond and an variable component that adjusts with inflation every 6 months. From 1998 to May 2001, the fixed component was always between 3% to 3.60% above inflation (source). However, since May 2008, the fixed rate has been between 0% and 0.7%. For the past year, the fixed rate has been a big fat zero. I would love to have a savings bond paying 3% plus inflation (currently 2.30%), as some current bondholders have, but I don’t expect that to ever happen again.

Now, that doesn’t mean that they aren’t still a competitive investment, especially for the short term. Since interest rates are so low, I still buy savings bonds even at a 0% fixed rate as part of my emergency fund cash reserves.

Savings Bonds are being slowly killed by the government. Even though savings bonds have historically encouraged people of all income levels to save, it appears that the US Treasury is slowly killing the savings bond. As recently as 2008, you could buy $30,000 worth of each type of savings bonds a year, per person. For a while, we were able to even use credit cards to buy them without a fee. Today, you can only buy $5,000 of paper I-bonds and $5,000 of electronic I-bonds a year, and even paper savings bonds are being phased out in 2012. (You can still overpay your taxes and buy paper bonds with a tax refund in 2012.) There was even a NY Times article last week entitled Save the Savings Bond. Basically, even if you wanted to create your retirement portfolio with savings bonds, you can’t.

Investing solely in inflation-linked bonds is actually recommended by some financial authors. The thing is, the government has so much debt that it greatly prefers US Treasury bonds which can be sold by the billions. Printing a $50 savings bonds is not even a drop in the bucket, it’s closer to a H2O molecule in the bucket. What you can invest in is Treasury Inflation Protected Securities (TIPS), which like I Bonds are backed by the government and pay an interest rate linked to inflation. Economics professor Kolitkoff in the book Spend ‘Til The End recommends your entire portfolio to be TIPS. The problem? You’re gonna have to save a lot. TIPS yields are very low, currently offering yields of negative 0.7% above inflation (!) for a 5-year bond to a meager 1.1% above inflation for a 30-year bond. If you’re okay with saving 50% of your income every year for 30 years, then this plan might work for you.

There is no easy answer as to the best place to invest right now. I am sticking with a diversified low-cost portfolio with both stocks and bonds (including a nice chunk of TIPS inside, which has done quite well recently), and you can see with this chart that it has also done pretty well the last decade.

US Treasury Ends Paper Savings Bonds in 2012

According to a press release, the Treasury will no longer sell paper U.S. savings bonds through banks and other financial institutions as of January 1, 2012. You can still buy electronic savings bonds through

I didn’t see any news regarding the purchase limits changing. The annual purchase limit is currently $5,000 in paper bonds and $5,000 in online bonds per Social Security Number. However, with the disappearance of paper bonds this would seem to cut the overall limit in half starting in 2012. There does seem to be a small loophole in the press release:

Series I paper savings bonds remain available for purchase using part or all of one’s tax refund. For more information on this feature, visit

Does this mean I should intentionally overpay my taxes by $5,000 this year, so I can buy an extra $5k in savings bonds in 2012? If there is continued inflation and low interest rates, Series I bonds could continue to be a good deal. They currently offer 4.60% interest for 6 months, plus an yet-to-be determined amount for the next 6 months. Even if that later rate is zero, you could still earn over 2.5% annualized over the next 11 months. For more details, see the rest of my posts on savings bonds.

Reminder: Savings Bonds Monthly Purchase Deadline Tips

Here’s a reminder regarding an opportunity to buy savings bonds near the end of May and receive an annualized return of 2.51% over the next 11 months. This would be 1% more than the highest current CD rates, with potential for continued higher interest. See this previous post for more details. The main catch to this opportunity is that you will not be able to sell your savings bonds at all for the next 11 months.

The reason why you want to buy at the end of the month is that savings bonds are labeled by month, and as long you buy anytime in May, it will be stamped with a May 2011 date. Then, on the first day of May 2012, you can redeem for an entire year’s worth of interest. However, you don’t want to miss the deadline, because then your bond will end up an April 2011 bond. The annual purchase limit is currently $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year.

For electronic bond purchases, Ken of DepositAccounts conducted an experiment as to how late you can wait to buy them on TreasuryDirect. To summarize, in order to avoid this, you should enter your purchase order a minimum of two business days before the last day of the month. For peace of mind, I would pad it 4 business days. You can schedule your purchase ahead of time online (recommended).

For paper bond purchases, you can visit your local bank and ask to buy them. Here are detailed instructions. Not all banks do this, so check ahead of time. The issue date of the savings bond will be the same day that the bank accepts payment. This date will be noted clearly on the application, and the bank should also stamp it to confirm. In this case, if you are familiar with the bank and you have the money available, you could conceivable wait until the last day the bank is open before the end of the month. Again, I’d try a couple days beforehand to be safe.

Savings I-Bonds March 2011 CPI Update: 4.60% Variable Rate = Competitve Interest Rates

New inflation numbers for March 2011 were announced on April 15th, so it’s time for the usual semi-annual update and rate predictions. This time around presents a good buying opportunity for a low-risk investment with interest rates higher than current bank CDs.

New Inflation Rate
September 2010 CPI-U was 218.439. March 2011 CPI-U was 223.467, for a semi-annual increase of 2.30%. Using the official formula, the variable interest rate for the next 6 months will be approximately 4.60%, depending on the upcoming fixed rate announcement.

Purchase and Redemption Timing Tips
You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a interest penalty of the last 3 month of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a little buffer time though, since if you wait too long your effective purchase date may be bumped into the next month.

Buying in April

If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.0%. You will be guaranteed an variable interest rate of 0.74% for the next 6 months, for a total rate of 0 + 0.74 = 0.74%. For the 6 months after that, the total rate will be 0.0 + 4.60 = 4.60%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy on April 30th and sell on April 1, 2012, you’ll earn a 1.66% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. This is better than any 1-year bank CD that I can find right now, keeping in mind the liquidity concerns and the purchase limits.

Given that you lose the last 3 months of interest (again, for holding less than 5 years), it might be better to wait long enough to grab that 4.60% for the entire 6-month period. If you buy on April 30th and hold until July 1st, 2012, you’d achieve a annualized return of ~2.29% over 14 months.

Buying in May

If you wait until May, you will get a new unknown fixed rate plus 4.60% for the first 6 months. My guess for the fixed rate would be 0.0% again, given current real yields for TIPS. The next 6 months will be based on an unknown rate based on future inflation. Worst case scenario, there will be zero inflation and you get paid nothing. Even in that case, if you buy on May 31st, 2011 and sell on May 1st, 2012, you would end up with an annualized return of 2.51% over 11 months.

If you are looking simply for the highest interest rate for a short period, then it would likely be better to wait until May 31st to buy up your savings bonds this year. If CPI inflation is very low or negative for the next 6 months and you are holding for at least 14 months, then it may end up being slightly better to buy in April. In the end, there’s more potential upside for buying in May, so that’s what I plan to do.

Low Purchase Limits
The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at As for paper, here is a post on how to buy paper savings bonds from your local bank. Some larger banks may have an electronic process.

For more background, see the rest of my posts on savings bonds. I’m keeping all of mine for the foreseeable future, due to their tax deferral possibilities and other unique advantages.

Found an Old Paper EE Savings Bond

Here’s a blast from the past. I think I was reading an article about how savings bonds stop earning interest after 30 years, and so I asked my mom if she bought any bonds when I was born. I don’t know why, I figured that’s just what people did back then. It turned out she did, and the earliest bonds happen to stop earning interest next this month. She dug them out of storage, and sent me a scan of them:

She bought an EE savings bond with a face value of $100 for the purchase price of $50 in February of 1981. I was two years old. Using the savings bond calculator at TreasuryDirect, I found the current value to be $300.04. So over the last thirty years, the value went up 6x. This works out to an annualized return of about 6.1%.

According to, for bonds issued before November 1982:

Bonds which have not reached final maturity are earning interest at either guaranteed or market-based rates; whichever produces the higher redemption value.

The guaranteed “original maturity period” was 9 years for this bond, which meant it was guaranteed to be worth the face value of $100 after 9 years. That works out to an 8.0% annual interest rate. If only we could get such a guaranteed return now, but the early 80s was a time of high inflation.

When the original maturity period ends, the bond enters a new 10-year maturity period where the government can reset the minimum rate. That’s why my bond is now earning only 4%. I can’t find the market rate for 1981, though. I could probably calculate it if I really wanted to, as it is defined as “85% of the average of 5-year Treasury marketable security yields”. The market rate in November 1982 was 13.05%!

If you have some old savings bonds, find them before they stop earning interest completely. In addition, the IRS supposedly requires you to report the interest as earned in the year of final maturity, even if you don’t redeem it. If you have a lost, stolen or destroyed savings bond, you will need to fill out Form PD F 1048. Also check out this Treausury Hunt page.

Savings I-Bonds November 2010 Fixed Rate: 0.0%

The new fixed rate for Series I Savings Bonds (“I Bonds”) was announced on 11/1/10 to be 0.0%, down from the previous fixed rate of 0.20%. Inflation protection is being held at a relative premium right now, so this isn’t all that surprising.

As predicted earlier, the new variable inflation-linked rate will be 0.74%. The total composite rate = fixed rate + variable inflation rate. Thus, any Series I savings bonds bought in November will have a total rate of 0 + 0.74 =0.74% for 6 months. If you already own I-Bonds, your fixed rate is always the same but the variable rate changes every six months from your purchase month, so it may not immediately change over this month.

Despite the relatively low fixed and variable rates, there are several unique advantages of savings I-bonds that can make them a potentially desirable investment. Combine this with their low annual purchase limits, and I am holding on to my bonds (and bought more last month in October).

For more related info, see the rest of my savings bonds posts.

Potential Unique Advantages of Savings I-Bonds

Even though the current interest rates on Series I Savings Bonds aren’t much higher than other alternatives, these I-Bonds do have some unique characteristics that can keep them attractive.

Inflation-Linked Returns

Along with TIPS (Treasury Inflation-Protected Securities), these are the only investments you can make that are explicitly tied to a measure of U.S. inflation. (Some foreign-countries also have inflation-linked bonds.) Interest rates don’t always move perfectly with inflation, so having such protection can be helpful.

Exempt From State and Local Income Taxes

The interest from I-Bonds are exempt from state and/or local income taxes. Of course, this is only an advantage if you are subject to such taxes.

Tax Deferral

You can use to either report your interest earned on an annual basis (like a bank CD), or have the interest reporting deferred until maturity or redemption. This can be especially advantageous if you are in a relatively high tax bracket now, but sometime in the future you believe you will have at least one year where you will have lower taxable income (possibly on purpose) and thus can redeem at a lower tax rate (perhps even zero). I-Bonds keep earning interest for up to 30 years.

Educational Tax Exclusion

If you meet several requirements, you can even avoid federal income taxes completely when paying qualified higher education expenses at an eligible institution. More information at this TreasuryDirect page.

According to this page (via Bogleheads Wiki), you can even contribute your proceeds to a 529 plan or Coverdell Educational Savings Account.

Series EE and I US Savings Bonds issued after December 31, 1989 may be redeemed tax-free in order to contribute the proceeds to a section 529 plan or Coverdell Education Savings Account. (To take advantage of this, file IRS Form 8815 to claim an exclusion for the interest after rolling the proceeds of these US Savings Bonds into a section 529 college savings plan or Coverdell Education Savings account. Write “529 College Savings Plan” or “Coverdell Education Savings Account” in the answer to 1(b), where it asks for the name of the educational institution. The specific citation in the tax code for this guidance is IRC Section 135(c)((2)(C).)

One of the restrictions that concerns me is that there is an income phase-out. In 2010, full phase-out occurs at a modified adjusted gross income of $135,100 for married filing jointly filers and $85,000 for single filers.