With the interest rates paid on savings accounts, money-market funds and short-term certificates of deposit only half to two-thirds their levels of less than a year ago, many savers, particularly retirees, are seeking ways to receive better yields with limited risk.
Joel S. Isaacson, a partner who is in charge of personal financial planning at Clarfeld & Co., a New York accounting firm, recommends U.S. government savings bonds. He cited a number of advantages to these bonds:
* There is no risk of loss of principal or default.
* Interest, now 6.375 percent, is 85 percent of the six-month average yield for marketable Treasury securities with five years to maturity. There is a guaranteed rate of at least 6 percent if the bonds are held for five years.
* Savings bonds are sold without commission or redemption fee at banks and savings and loan associations and by mail or over-the-counter at Federal Reserve banks or Treasury offices.
* Interest is not subject to state and local taxes.
* For middle-income people, savings bonds purchased since Jan. 1, 1990, are free of federal taxes when used to pay college tuition for the bondholder, the holder's children or a spouse.
* Holders have flexibility in deciding when to recognize the interest for federal taxes: at redemption, or annually as it accrues. But a decision to take the interest annually will affect all of a person's savings bond holdings, not just certain bonds, and could apply to future purchases.
Series EE bonds are sold at half of their face value in eight denominations ranging from $50 to $10,000, and savers may buy up to $30,000 each year. The bonds accrue interest until they mature 12 years after they are issued.
By purchasing bonds in small denominations, Mr. Isaacson noted, savers can cash in a portion as income is needed, provided they have held them at least six months.
"This is for the person who has been rolling over CD money," he said. "In the environment we're in, it's not bad." CD rates vary NTC with maturity and currently range from a fraction over 4 percent for one month to about 6.4 percent for five years, but the entire yield is taxable.