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The Surprising Way to Earn More Interest on Your Savings

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If you have a savings account, you know how low interest rates have gotten lately. It's hard to get much income from your savings without taking drastic measures like investing it in the stock market.

But there's one way you can boost your income on your savings without taking any risk at all. You'll find that solution in an unexpected place: simple savings bonds.

How savings bonds will pay you more
If you thought the savings bond that your grandparents gave you when you were born was the last one the U.S. Treasury ever issued, you're not alone. But certain savings bonds remain a smart savings option, especially given the low rates available elsewhere. In particular, Series I savings bonds, whose returns are linked to inflation, offered rates that knock the socks off similar alternatives -- and they offer extra benefits that those alternatives don't.

Right now, I bonds pay a rate of 1.76%. You have to hold the bond for a minimum of one year, and if you cash them in before five years pass, you have to pay a penalty of three months' interest. Rates change every six months based on the rate of inflation. For instance, the previous rate on I bonds was 2.20%.

But even with those terms, compare I bond rates with what you can get elsewhere:

  • Among the top one-year bank CDs, only a few manage to top the 1% mark. General Electric's (NYSE: GE  ) GE Capital division offers 1.05% right now, but the average rate nationally is just 0.26%.
  • If you lock up your savings for five years in a bank CD, the best rates are still solidly below 2%. AIG's (NYSE: AIG  ) banking division pays only 0.65% on a five-year CD.
  • Even if you're willing to give up FDIC insurance protection, offerings like Ford's (NYSE: F  ) Interest Advantage and Caterpillar's (NYSE: CAT  ) PowerInvestment notes still don't match up. Ford pays a bit above 1% right now, while Caterpillar is slightly lower.

Those companies pay such low rates because they mostly don't need capital from outside sources right now. With access to credit markets so easy and cheap, paying up for ordinary savers doesn't make business sense.

Other advantages of savings bonds
Another great benefit of savings bonds is that you don't have to pay taxes on the interest until you cash in the bond. Compared with regular CDs and savings accounts, that feature can let you defer between $10 and $40 in potential tax liability for every $100 in interest you get. If you later use the proceeds for educational purposes, that interest becomes tax-free for many taxpayers.

I bonds' floating rates do introduce some uncertainty into the savings decision. But with their flexibility, they may be your best savings option even if you do end up needing to take out money sooner rather than later.

Learn more about savings bonds at the Treasury's website.

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Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2013, at 12:15 PM, MacRice wrote:

    Be sure to read the fine print on bonds! For education, my wife an I both bought bonds for our two daughters. After the fact they added income guidelines, so our bonds ARE NOT tax free. We bought our bonds with "after tax" money, but that does not make a difference either. Many of the bonds will stop earning interest before we reach what ever the new higher retirement age will be. Even then, because we have planned and saved for retirement, they will likely still be taxed. There is also talk of taxing the full value of the bond, not just the interest.

  • Report this Comment On April 06, 2013, at 9:30 PM, MUDFLAP514 wrote:

    WTF!! 1 to 3% interest on delayed savings!!!....How about 4% quarterly.. GO SCRUB YOUR A** WITH A PINEAPPLE!". Let's have these bank CEO cut back on theirs and their buddy perks and transfer that monies to paying interests. AGAIN! Back in the day..and it wasn't that long ago bank CEO'S were making enough money thank you....

  • Report this Comment On September 19, 2013, at 11:08 AM, TheSarah007 wrote:

    Ow you guys are hurting my head. can you just be grown ups please? No yelling.

    I need some actual advice. I am not working due to a delightful car wreck, and need to sock away my savings someplace other than a shoe box in my closet. Is it possible at all to make any interest on say, just $1,200? Don't laugh at me, life right now? Not so much with the easy.

    My Dad always insisted on doing my taxes (he was scary, you would have let him too) and handle that stuff, so i feel fully crippled when it comes to this stuff. Some friends did a fundraiser for me and didn't raise enough, is it possible to do anything with that smallish amount?

    Many thanks in advance. Except the pineapple guy.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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