Savings Bonds add up nicely

Sylvia Porter

April 23, 1991|By Sylvia Porter | Sylvia Porter,1991 Los Angeles Times Syndicate

The end of April marks the 50th anniversary of the introduction of United States Savings Bonds. But the bonds that today are the most popular form of investment in America are quite different from the ones your parents bought in 1941.

For instance, in May the interest rate paid on Savings Bonds will be adjusted. When they were first issued -- in fact, through their first 40 years -- the yield was fixed. In 1982, that all changed. The yield at that time became tied to the rates paid on other securities issued by the federal government.

Since 1982, the interest paid on bonds is re-evaluated twice each year. When the changeover to the floating rate took place, the rate was 11.09 percent. This seems ridiculously high, but interest rates in general were out of whack then. Needless to say, Savings Bonds have not reached that six-month high since.

The current six-month rate is 7.19 percent, but that is likely to change a little in May. What do these figures tell you? By themselves, very little. Savings Bonds differ from other government securities in this respect.

When you buy a treasury security, you pay face value minus interest -- in other words, your interest comes in the form of what amounts to an immediate refund, which varies depending on the rate at the time of sale. Not so with Savings Bonds.

What varies is the point at which they mature and actually can be redeemed for full face value. Unlike other treasury securities, this date is not fixed at the time of purchase. Instead, the six-month rates are averaged.

As a safeguard, though, there is a minimum rate below which that average cannot drop. Since 1986, the minimum has been 6 percent. It is important to note, though, that while the rates may fluctuate, the minimum rate is tied to the time the bond was sold. If you bought bonds a week before the floor was lowered, you still have the benefit of the older, higher rate.

Savings Bonds may, by the way, be cashed before they mature -- but not during the first six months. After six months, you may cash them, but your yield will be paltry at best -- 4.16 percent after six months, then on a sliding scale until five years have passed, at which time the market rate kicks in.

At the beginning of last year, another enhancement was added to Savings Bonds. If they are used to finance education, their interest can be totally tax exempt.

Bonds bought after Jan. 1, 1990, carry tax-exempt yields if they are used to pay for college tuition in the year they are redeemed. However:

* They must be purchased in the name of the parent or guardian, because tax exclusion is taken by the parent or guardian.

* The yield can be totally exempt, partially exempt or fully taxable, depending on the family's other income. A single parent who has an adjusted gross income of less than $41,950 will pay no taxes on such bonds, while at $57,700 the exemption disappears. For married couples filing jointly, the limits are $62,900 and $94,350.

The real beauty of Savings Bonds is elsewhere, though. Chances are, you can sign up at your office to have an amount deducted each pay period for the purchase of a bond -- as little as $25 to buy a $50 bond. You receive an impressive-looking government certificate. It means that you have saved money in the safest place possible and at attractive rates. If you have difficulty maintaining the discipline necessary to save, this is definitely for you. You never see the money in your paycheck.

In fact, you can't spend it, not for six months, and at that point it's easier to leave it where it is.

As a percent of disposable household income, individual saving in Japan is almost three times that in the United States. The U.S. Savings Bond campaign wants to change that. For the year 2000, the goal is to double sales.

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