Certificate accounts and U.S. savings bonds both offer an easy, convenient way to invest without going through a broker. These savings vehicles accumulate interest over time with a high degree of safety. While both are great options for steadily growing your investment, the biggest difference comes down to time.
Bonds were designed to be true, long-term investments while a certificates term length can vary from as little as three months upwards to 10 years. Today, we’ll weigh in on certificates vs. bonds and help you determine which investment vehicle is best suited to meet your short and long-term financial goals.
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U.S. Savings Bonds
A bond is guaranteed to double in value over a period of 20 years and can continue earning interest up to 30 years. (This is why savings bonds are traditionally gifted to children at an early age.) Bonds can’t be cashed during the first year and there’s a penalty of three months’ interest for cashing it before five years. After this period of time, you can withdraw the purchase price in full but will forgo future interest payments.
There are two kinds of U.S. government savings bonds: Series EE and Series I. Series EE savings bonds pay a fixed interest that’s guaranteed to double in value over 20 years. The rate is fixed when purchased and the tax is deferred until the savings bond is cashed.
Series I savings bonds feature both a fixed and variable interest rate. The fixed rate is set when purchased. Then, the variable rate is adjusted every six months moving forward based on inflammation. For a more in-depth comparison of Series EE and Series I savings bonds, click here.
A certificate of account is issued by a bank or credit union and is a form of savings account. It yields more interest than a traditional savings account and can be purchased for varying term lengths. As a rule of thumb, the higher the term, the higher the interest rate.
With certificates, the interest rate at any given time is tied to the current prime rate. Because of market inflations, it’s wise to avoid tying up your money for a long period of time. Many people use a strategy called “laddering” to offset low rates and overlap access to their money.
Both savings bonds and certificates are safe investments. Bonds have an AAA rating and are backed by the full faith and credit of the U.S. Government. Additionally, the FDIC insures certificates accounts up to $250,000. Both savings bonds and certificates are relatively liquid. However, cashing them in before their redemption date can be costly.
With bonds (especially Series I), you risk a loss in value and dismiss future interest payments. With certificates, banks and credit unions impose penalties that could dismiss the interest you’ve earned thus far or take a fraction of the principal. Of the two investment vehicles, certificates are more flexible. But, keep in mind; if you need access to funds in the certificate, it’s better to stick with a shorter term length in order to avoid the penalty.
Any interest earned from a savings bond is taxable. You’ll need to report this income in your federal taxes each year. With Series EE bonds specifically, you may qualify for education tax exclusion if used to pay for higher education, tuition and other fees. Income earned from certificates is also taxable. These are taxed as interest income rather than capital gains, which carries a lower rate.
You’ll receive a 1099INT from the bank or credit union holding the certificate account. If the term length spans over several tax years, you’ll only pay taxes on the portion that was earned that tax year. However, if you choose to hold the certificate in a retirement account like a 401(k), those taxes can be deferred.
If you’re looking to invest in the long-term, a U.S. savings bond is a fantastic choice. If you’re looking to save for the short-term, or save long-term using the laddering technique, a certificate account offers more flexibility. Both are safe financial investments with a steady return and low risk.
To learn more about certificates and other savings accounts, reach out to our team today at (405) 235-3030 or 1(800) 678-5363. Our trusted financial advisors are here to assist in developing a plan that meets your long-term goals.
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