Distinguishing Between U.S. Savings Bonds and CDs

U.S. Savings Bonds

U.S. savings bonds present a durable investment opportunity, guaranteeing a doubling of value over 20 years with the potential to continue earning interest for up to 30 years. This longevity makes them a popular choice for gifting to newborns due to their reliable growth over time.

The Series EE savings bond ensures a fixed interest rate that doubles the bond’s value over two decades, with tax deferment until redemption. The current fixed interest rate for EE bonds is 2.70% until April 2024.

Conversely, the Series I savings bond combines both fixed and variable interest rates, protecting investors from potential interest rate fluctuations. As of April 2024, the fixed interest rate for I bonds remains at 5.27%.

Certificates of Deposit (CDs)

Certificates of deposit, offered by banks, function as an enhanced savings account with slightly higher interest rates. CDs can be tailored to short-term (one month) or long-term (up to 10 years) maturity periods, correlating with varying interest rates based on the prevailing prime rate during purchase.

By utilizing a technique known as CD laddering, investors can ensure exposure to the most favorable rates available while maintaining liquidity as CDs mature periodically.

Should I Keep My Emergency Savings in a Bond or a Certificate of Deposit (CD)?

In the event of a financial emergency necessitating immediate access to funds, penalties are imposed for premature withdrawal of funds from CDs or bonds. To circumvent such fees, maintaining emergency funds in a more liquid account, like a high-yield money market savings account, is a prudent approach.

Is It Better to Invest in CDs or Bonds?

Both CDs and U.S. savings bonds offer low-risk investment opportunities, each with varying maturities and interest rates. While CDs are FDIC-insured up to $250,000, U.S. savings bonds carry the full backing of the U.S. government and are not subject to coverage limits.

The Bottom Line

Both savings bonds and CDs boast a high degree of safety in investments. U.S. savings bonds hold a AAA rating and are fully supported by the U.S. government, while FDIC insurance secures CDs up to $250,000.

Earnings from CDs are subject to both state and federal taxes as interest income. Conversely, savings bond interest is federally taxable, without additional state or local taxes imposed. Education tax exclusions may apply to Series EE and I bonds if used for qualified education expenses.

Looking to invest your money safely while earning a modest profit? U.S. savings bonds and certificates of deposit (CDs) are both popular options that provide a secure way to grow your savings. These investments involve lending money in exchange for interest payments, offering a hassle-free way to grow your wealth without the need for a broker, ensuring the safety of your savings and allowing them to earn interest.

While both options offer a level of security, they differ in their time commitments. U.S. savings bonds are tailored as a long-term investment choice, whereas CDs come with varied maturity periods, even as short as one month.

U.S. Savings Bonds

A U.S. savings bond doubles in value over 20 years and continues to accrue interest for up to 30 years, making it a popular choice for gifting to newborns due to its growth potential.

However, a savings bond cannot be cashed in during the first year, and an early withdrawal within five years incurs a three-month interest penalty. After five years, you can redeem the bond for its purchase price, forfeiting future interest earnings.

There are two primary types of U.S. government savings bonds: Series EE and Series I. Series EE offers a fixed interest rate doubling the bond’s value over two decades, while Series I provides a mix of fixed and variable rates adjusted semi-annually based on inflation to guard against rising interest rates.

Certificates of Deposit (CDs)

CDs, issued by banks, offer slightly higher interest rates than regular savings accounts and come with flexible terms ranging from one month to a decade, with shorter terms typically linked to lower interest rates.

CD interest rates align with the current prime rate, making them an attractive option when rates are low. Investors can employ a laddering strategy to optimize returns by purchasing CDs regularly to access the best rates while maintaining liquidity.

While CDs offer flexibility, early withdrawals trigger penalties. Therefore, they may not be ideal for emergency funds since penalties can erode interest and principal. It’s essential to compare rates from different banks to ensure you get the best deal.

Should I Keep My Emergency Savings in a Bond or a Certificate of Deposit (CD)?

In case of a financial emergency, withdrawing savings from a CD or bond prematurely may incur penalties. It’s wise to maintain emergency funds in a highly liquid account like a high-yield money market savings account to access funds promptly without penalties.

Is It Better to Invest in CDs or Bonds?

Both CDs and U.S. savings bonds offer low-risk investment opportunities with varying maturities and interest rates. CDs are insured by the FDIC up to $250,000 per account, while U.S. savings bonds carry the backing of the U.S. government without coverage limitations.

How Do I Buy a Savings Bond?

To purchase an EE savings bond, access TreasuryDirect online or buy paper Series I bonds through your federal tax return filing.

The Bottom Line

Both U.S. savings bonds and CDs are highly secure investments. U.S. savings bonds boast a AAA rating and full government backing, while CDs offer FDIC insurance up to $250,000. CDs’ earnings are taxed as interest income at state and federal levels, with potential tax deferral in retirement accounts. Savings bond interest is taxable at the federal level but exempt from state and local taxes. Series EE and Series I bonds may qualify for education tax exclusions for higher education expenses, offering added financial benefits.