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To
Your Wealth / The Best Kept Secret Justus
Morgan |
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This month’s column is written by
my associate, Justus Morgan, who, over the past three years, has extensively
researched specific investment strategies including savings bonds, exchange
traded funds and index funds. It is
not very often that I get the opportunity to share a secret with an audience
for their own benefit. But since you’re not going to hear it from too many
other sources, I’ve decided to spread the word about what I think is one of
the best-kept secrets in personal finance. Perhaps by now you’re asking, what
is the secret? Two words: savings bonds. More specifically, U.S. Treasury
Series I Savings Bonds. You
may have heard about savings bonds in the past since they’ve been around
since the 1940’s. You may also have dismissed them as something to simply buy
for your children or grandchildren’s birthday presents. I suggest you may
want to look more closely at savings bonds because some of their features are
more attractive than anything you’ll find at a bank or from your stockbroker. The most
notable feature of Series I Savings Bonds is their current interest rate,
which is 4.80 percent and is guaranteed for six months. After six months, the
interest rate changes based on the current inflation rate. This provides a
great hedge against rising prices in areas such as housing, energy and health
care costs since all of these items impact the inflation rate. Another great
benefit of savings bonds is you do not pay federal income taxes until you
cash in the bond, which can be up to 30 years after the original purchase. In
addition, there are no state income taxes on savings bonds. Savings bonds are
as close as you can get to a risk free investment because your principal
cannot decline (even if deflation occurs) and your investment is backed by the
For
lower income parents, savings bonds are another option to fund your child’s
college costs tax-free. The income limit is adjusted annually so be sure to
check with your tax advisor to see if you qualify. They continue to make
great gifts for children and grandchildren because they are convenient, easy
to purchase and do not require any tax reporting until redeemed. Savings
bonds are issued monthly for applications received any time before the last
business day of that month. For example, if you purchased a bond on September
29, you would have received the interest for the entire month of September.
New issue rates are reset each November and May based on the inflation rate
for the preceding six-month period. That means if you buy savings bonds
before the end of October you will be guaranteed to earn 4.80 percent until
April when your interest renewal rate will be adjusted. You
can purchase as little as $25 up to an annual maximum of $30,000 per person.
By purchasing each year, you have the opportunity to build a significant
portfolio of savings bonds over a short number of years. You can purchase
them at any bank or directly from the United States Treasury Department,
(application is available online). My
recommendation is to investigate some of the other features of savings bonds,
including other types available and their limitations, to determine which one
is most appropriate for your situation. You can begin by going to TreasuryDirect,
which is the official U.S. Treasury website for savings bonds. Justus
Morgan is an Associate at Financial Service Group, a registered investment
advisory firm in |