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Safe Places for Savings

by Kevin McKinley - January 27th, 2016

Posted Under: investing

With the stock market and the economy on unstable ground, many investors are more interested in the return of their money, rather than the return on their money.

Stock and bond mutual funds still have their merits, especially as part of a longer-term investment portfolio. But these options can give you a little bit of yield, while still providing lots of transparency, liquidity, and security.

Certain CDs

Perhaps due to the recent increase in interest rates dictated by the Federal Reserve, you may find that yields on certificates of deposit have risen somewhat in the last few weeks.

There are two factors to consider when stretching for the highest rate of return with CDs. Start by looking at the longest maturity possible—say, three to five years.

But also find out what the “substantial penalty for early withdrawal” will be if you want or need the money before the maturity date. Six to twelve months’ worth of interest is reasonable, but anything more than that should give you pause.

Check the rates at your local bank or credit union, or look nationwide for CDs at a site like BankRate (www.bankrate.com).

“Brokered” CDs

If you’re looking for a little more return on your CD investments and can handle a little more risk, you may want to consider “brokered” CDs, available via most investment firms.

These CDs are still FDIC-insured for the interest and face value, and often offer longer potential terms and/or higher yields than what you could get if you were to contact the issuing banks directly.

But there are a couple of cautions to consider. First, most investment firms price these CDs like bonds, so once you purchase them you may see the value increase or decrease (until they mature, when you will get the stated face value and any interest due to you).

By that same token, if you need the money from these CDs before the maturity date, you will have to sell them for a market price that may be higher or lower than the face value of the CDs, and/or what you originally paid for them.

Safe savings bonds

Another way to stash a little cash is by purchasing Series I savings bonds, available online at the U.S. Treasury (www.treasurydirect.gov –-the initial purchase process is a little tedious, so set aside some time before you start).

Up to $10,000 of these bonds can be purchased per person per calendar year, with an additional $5,000 available if you use a federal tax refund to make the purchase.

The interest rate is tied to the Consumer Price Index, and is reset every May 1st and November 1st. The most recent rate was 1.64%, and there is no state tax income on the interest.

Better yet, bondholders can decide if they want to declare (and pay taxes on) the interest every year, or wait to declare (and pay taxes on) the interest when they cash the bonds in, or the bonds mature (whichever comes first).

Savings bonds can’t be bought in retirement accounts such as IRAs and Roth IRAs. But there is a strategy one can use to save money on taxes, while using the bonds to save for retirement.

For instance, those currently in a higher income tax bracket (i.e., workers) might buy the bonds now, and then wait to cash the bonds in (and declare the interest) until they are retired, and likely in a lower tax bracket.

Series I savings bonds have a 30-year term, but after twelve months of ownership you can redeem them with a penalty of just three months’ worth of interest. After holding them for five years, there is no penalty for an early redemption.

The sooner you purchase these bonds, the sooner the redemption “clock” starts ticking, and the sooner you will be earning a higher rate of return on your savings, while still being able to sleep soundly at night.