It is still a good idea to look into alternatives to traditional savings accounts.
Years ago, you could put all your money in a savings account and earn 5% or more, but when the recession began in 2008, central banks dropped interest rates in an effort to boost the economy. Although some interest rates are starting to rise again, it is still a good idea to look into alternatives to traditional savings accounts.
These bonds are directly issued by the United States Treasury. You can buy them online in any denomination up to $10,000 per person annually. The interest rate of I-bonds is equal to the rate of inflation as calculated by the Consumer Price Index, which includes the price of health care, food, energy, housing and other goods. Every six months, the interest rate of I-bonds adjusts.
You only pay taxes on I-bonds when you cash them in, and the interest is not taxed if you use your I-bonds to pay for college. They are also exempt from local and state income taxes.
I-bonds can only be cashed after one year. If you cash them in before five years have passed, you are charged a minor penalty equal to three month’s interest.
I-bonds are a great alternative to traditional savings accounts because they are so low maintenance. After setting up an account with the Treasury Department, it is very simple to purchase I-bonds at any time in the future. You can hold them for as many as 30 years, so you don’t have to roll them over like CDs, and you are not required to report the interest at tax time until you sell your I-bonds.
The interest rate of I-bonds is always competitive. Instead of spending your time shopping around for great CD rates, investing in I-bonds is like having the government take that step for you for free.
It is not hard to cash in I-bonds, but it is a bit more difficult than the buying process. This is actually a plus because it stops people from spending their I-bond savings impulsively. To cash your I-bonds, you must log into the Treasury Direct system, choose the bond you would like to cash in and perhaps pay a very small penalty, depending on how long you have held the I-bond.
Certificates of Deposit (CDs)
CDs have fewer tax advantages than I-bonds, and they are not inflation-indexed. This makes CDs a slightly more risky choice. You must pay a penalty if you want to take your money out of a CD before the term expires. That penalty is generally six months to one year’s interest.