With savings accounts and certificates of deposit paying extremely low interest rates in the last two years; Is it time to consider putting money in US savings bonds?

Depending on your age, you may remember years ago when many employers offered automatic payroll deduction to accumulate bonuses. You could even have walked into your local bank or savings and loan branch and purchased the bonds.

Today is quite different, purchases are made directly from the US Treasury either online or through the postal service. The amount per year you can buy has also changed from $15,000 per taxpayer’s social security number to $5,000 today.

However, you can purchase both a bond online (electronic version) and the typical old paper bond, so the annual total is $10,000 per year. Since the annual total is based on each individual’s social security number, a married couple could each purchase $10,000 each year.

Advantages of US Savings Bonds:

• Tax deferred, you only pay income taxes when you redeem the bonds.
• Small denominations, you can buy in quantities of $25 or more.
• Better interest rates than most savings accounts or money market funds.
• Tax-free under certain circumstances depending on family income and if used for education.
• Exempt from state and local income tax.

There are currently two types of savings bonds you can buy, which are an (I) or EE bond. Forget EE bonds, since they lock in a rate for thirty years, at today’s low rates they’re not worth the low yield from the investment. However, the (I) bond adjusts its interest rate every six months and will continue to earn interest for up to thirty years.

Keep in mind that all bonds purchased recently or in the past stop earning interest after thirty years. So if you have old savings bonds that are more than 30 years old, you should redeem them and reinvest them elsewhere or in a newer bond.

Bond Redemption:

You must hold the bonds for at least twelve months, and if you redeem them before five years, you will lose the last quarter of the interest earned.

Over the past five years or so (I), bonds have actually outperformed many other liquid investments, including savings accounts, certificates of deposit, and mutual funds. The current six-month yield is 4.60 percent as of September 2011. The bond is also adjusted twice a year, being May and November. The six-month yield is calculated based on a fixed rate of return and a variable semi-annual rate of inflation.

Long story short, if you’re not happy with what your bank or money market fund is offering, consider a US savings bond as an alternative.