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Should You Invest in Series I Savings Bonds or CDs?

Find out whether it is a better financial decision to invest your money in a Series I savings bond or a certificate of deposit (CD). Both offer higher interest rates than typical savings accounts, but they also require that you not withdraw the money for a certain period of time or you'll have to pay an early withdrawal penalty.

Series l savings bonds and certificate of deposits (CDs) are low-risk, long-term investments that earn more interest than a savings account, and are relatively inexpensive to purchase or open.

These savings solutions can supplement your retirement, pay for your education, or help you achieve a goal.

But while both offer a guaranteed return on your investment, they are different products. Here’s what you need to know to decide which one is right for you.

What are Series l Savings Bonds?

Series l bonds are a type of savings bond issued by the U.S. Department of Treasury and are one of the safest investments.

These bonds are unique because the interest rate includes two components: a fixed rate and a variable inflation rate.

While the fixed rate doesn’t change over the life of the bond, the variable rate resets or adjusts every six months (May 1 and November 1) based on the Consumer Price Index. This inflation protection is designed to prevent loss of purchasing power.

The fixed rate is combined with the inflation rate to determine your actual rate of return (or composite rate), which is compounded semiannually.

The formula to calculate the composite rate is:

  • Composite rate =

How to buy

To purchase a Series l savings bond, you must be either a U.S. citizen, a U.S. resident, or a U.S. employee (if you work outside of the country).

You can purchase a bond for yourself, or give a Series l bond as a gift. This includes purchasing one for a child under the age of 18 and putting the bond in the child’s name.

Even though you can no longer buy paper bonds from financial institutions, these are still available for purchase from the U.S. government, but only if you use a tax refund to purchase the bond.

To do this, you must complete IRS Form 8888 and specify how much of your return you want to put toward the purchase of a bond. You can spend all of your return on a bond, or only a portion and have any remaining funds mailed or direct deposited into a bank account.

If you prefer an electronic bond, set up an account with TreasuryDirect and purchase your bond online.

Purchase limits

One good thing about Series l bonds is that you can purchase one with little out-of-pocket cash. You can buy an electronic bond in any amount from $25 to $10,000. If you get a paper bond, these are available in the following amounts: $50, $100, $200, $500, and $1,000.

Unfortunately, you’re limited in the amount of bonds you can purchase in a calendar year. For an electronic bond, you can purchase up to $10,000 in a calendar year, and up to $5,000 in a calendar year for a paper bond.

Rules

The longer you keep the bond, the more interest you’ll earn. You’ll earn interest on a Series l bond for up to 30 years, although you can cash in the bond at any time after the 1st year.

Keep in mind that if you cash in a bond before year five the penalty is three month’s of interest.

Interest earned on a bond is taxable income.

You don’t have to pay state or local tax on earnings. But you’ll pay federal income tax on earnings.

Unless, of course, you use the bond to pay for higher education. In this case, you don’t have to pay federal tax.

What is a Certificate of Deposit?

A CD is another safe investment that earns a fixed rate. Like Series l savings bonds, the longer you have a CD, the more interest you’ll earn.

These are time deposits where you allow a financial institution to use your money for any purpose for a certain number of months or years.

Since you’re agreeing to leave your money in the bank untouched, you’ll earn a higher interest rate compared to a regular savings accounts.

When your CD matures at the end of the term, you’ll get back all of your money plus interest.

Choose your terms

Even though your money isn’t freely available for withdrawal, certificate of deposits are an attractive option. These are issued by banks, so there’s confidence in knowing that your money is FDIC-insured.

You can also choose a CD term that matches your savings goal.

Some time deposits have terms as short as 30 days, or up to six months or 12 months. If you want to keep your money in the bank longer, you can choose a longer-term — perhaps up to five years.

Ideally, you shouldn’t withdraw funds from your CD before maturity. If you need to access your money early, you’ll pay a penalty -- longer CDs have bigger penalties.

Certificate of deposits are relatively inexpensive to open, depending on the bank. Some banks offer CDs with minimum deposits of $500, whereas other banks might require a minimum deposit of $2,500.

Because a certificate of deposit is a special type of deposit account that earns interest, interest earnings are taxed on both the state and federal level. You’ll report this income for the year that you earned it.

Special CDs

Different types of CDs exist with special features:

Bump-up CD

This CD gives you the option to increase your fixed rate if your bank increases its APY. Because of this provision, these CDs start off with a lower interest rate and typically have higher minimum deposit requirements. Keep in mind, many banks will limit the number of times you can request a higher rate.

No-penalty CD

If you like the idea of a CD but prefer keeping your cash liquid, ask your bank about a no penalty certificate of deposit. The upside is that you can withdraw your money from these CDs with no penalty. Unfortunately, these CDs also earn lower interest rates.

Step-up CD

These certificate of deposits start off with a lower interest rate, and then the rate gradually increases throughout the term.

Jumbo CD

This is an option if you have a large sum of money to deposit into a certificate of deposit. These products usually have high minimum balance requirements — sometimes as high as $100,000.

However, these CDs also have higher interest rates, resulting in a substantial return on your investment.

IRA CD

This product combines a certificate of deposit with an individual retirement account (IRA).

These accounts aren’t investments, but rather a basket for holding different types of investments such as stocks, bonds, and mutual funds.

An IRA CD is a retirement account that’s invested only in certificates of deposits.

This provides a safe place to keep money for retirement.

CD ladder. A CD ladder offers the best of both worlds, allowing for short-term and long-term investments. You can invest funds of equal amounts into different CDs with different maturity dates. This way, you don’t lock all your money into a single long-term CD. Because some CDs will mature sooner than others, you’re able to access some of your cash sooner.

Which is the Best Choice for You?

Both Series l savings bonds and certificate of deposits are low-risk, guaranteed investments. But depending on your savings goals, one might be better than the other.

Either option can work if you’re putting money aside for a long-term goal such as retirement or buying a home. Even so, the timeframe you set for a particular goal will determine which option to choose.

Let’s say you’re planning to purchase a home within the next five years. If so, you might do better investing in a certificate of deposit because you can choose from a variety of terms up to five years. Choose a term of one, two, three or five years based on when you’ll need the funds for a purchase, and then pull out your money without penalty.

A savings bond wouldn’t work in this scenario because if you cash in the bond prior to five years you’ll lose three month’s of interest as penalty.

A Series l savings bond, on the other hand, is perfect if you’re looking to supplement your retirement income. Remember, these bonds earn interest for 30 years. You can keep the bond long-term, maximize your return, and then cash in the bond when you are ready to retire.

What if you receive an inheritance over $10,000? A Series l savings bond won’t work in this situation because you’re only allowed to purchase up to $10,000 in electronic bonds in a calendar year.

If you prefer putting all of your inheritance into a safe investment, the good news is that some certificate of deposits allow you to deposit over $10,000.

Conclusion

Both a Series l savings bond and a certificate of deposit offer a guaranteed return.

This is perfect if you want to invest without the risk of losing money.

They can boost your net worth and offer an affordable way to reach many of your long-term and short-term financial goals.