Treasuries -- How to Hand It to Uncle Sam

Your purchase of Treasury bonds, bills and notes is simply a loan by you to the federal government, with a promise to pay you back from the revenue of the U.S. Treasury. Because of the credit-worthiness of our government you get the strongest security in the world.

On the other hand, you also get one of the lowest interest rates around. That's how all lending goes, the better the pay back record, the lower the interest on the loan.

Safety -- At a Price

If you consider treasuries as an investment you'll have to decide on several factors. First, whether the safety warrants the low interest rates. Corporate bonds pay more, and stocks can take you over the moon -- but with risk.

Then you'll have to decide which of the many types of Treasuries you want. They differ by maturity date (when they will pay back your principle) and minimum buy (the smallest loan you can offer).

Lately, with the stock market so high, the government has had to add bells and whistles to get a loan from you. Through the years the folks that market treasuries have come up with three incentives -- convenience, inflation indexing and tax savings.

Incentive #1: Convenience of Direct Buying

T-bills, bonds and notes
If you live near a Federal Reserve Bank, you can buy treasuries commission-free (at least a $70 savings each from bank or broker fees). You can also buy them through the mail. Frequent buyers should read "Buying Treasury Securities" (Federal Reserve Bank, Richmond, Public Service Department, PO Box 27622, Richmond, Virginia, 23261, price $4.50). Or get free information from the Bureau of Public Debt, 1300 C Street S.W., Washington, D.C. 20239-1500, www.publicdebt.treas.gov, 202-287-4097.

U.S. Savings bonds
As long as you plan to buy two bonds of any denomination per year, you can authorize the Treasury to automatically charge your bank account, through their Easy Saver Plan. The minimum debit is $25.00. To enroll, complete the form available at the Bureau of Public Debt's Website at www.easysaver.gov, or by calling (877) 811-SAVE, or write to U.S. Savings Bonds Easy Save, P.O. Box 802, Parkersburg, West Virginia, 26102-0802. A photocopy of the form can be submitted, but it must have an original signature. Treasury debits your account on the day specified and mails the bond(s) to you or to the person designated, such as a child or grandchild.

In about four weeks you'll get a written confirmation that your account is active and can begin receiving bonds as requested. You don't need to do anything else and bonds will be issued automatically until you cancel the enrollment.

Incentive #2: Inflation Protection

New "I" bonds are indexed for inflation. The rates will still lag behind many CDs and corporate bonds, and you may not feel the benefit in this low inflation environment. Still, you'll get the safety of the Treasury and a shot at higher interest if the Consumer Price Index spirals up.

Incentive #3:Tax Breaks

Treasuries are state and city tax-free, but they are not federal tax-free. It's a matter of history. The Constitution prohibits the federal government from taxing the state and the state the federal government. Therefore, money, in the form of interest that you are paid by any level of government, can't be taxed by the other level.

TRUE WEALTH

In my opinion treasures are not a growth investment unless you plan to speculate in the interest rate market. They should be bought solely for income, or for the occasional wedding or bar mitzvah gift. Even then, with stocks paying dividends and municipal bonds completely tax-free, you need to compare income options.

In comparing different bonds and certificates of deposits from banks or brokerage houses, first look at the AFTER TAX interest rate.

Here's the formula:

Subtract your Federal Tax bracket from 100, then make the resulting number a percentage. Take the percentage of the taxable investment available to you. Compare that number to available tax-free yields. Which gives you more?

Example:
15% tax bracket
100 - 15 = 85 = 85%
Take 85% of the taxable yield available to you. Compare to tax-free yield.

For example, those in the 36% tax bracket need 9.4% taxable = 6% tax exempt.

Then compare the maturity dates. Will the money be available when you need it? Will there be a penalty for getting it early? Will the opportunity to use the money (opportunity cost) for other investments pass you by for too long?

Finally, read the economic news to get an idea of the Federal Reserve's policy on interest rates. When they seem to be going up, as today, hold off buying. If you think they will go down, lock in higher rates before the change.

A WHO'S WHO OF TREASURIES

Treasury bonds: Maturities of 10, 20, and 25 years. Minimum buy, $1,000 per bond.

Treasury bills: Maturities of 13 to 26 weeks. Minimum buy, $10,000 for the first purchase, $5,000 for multiples.

Treasury notes: Maturities of 52 weeks up to 10 years. Minimum buy, $5,000 although denominations of $1,000 are available.

Agency bonds and notes (such as GNMAs -- Government National Mortgage Association): Maturities of 30 years. Minimum buy, $25,000 for the popular GNMAs. These are issued by a governmental agency, not by the federal government itself, and therefore they are taxed by the state and the municipalities.

Savings bonds EE and HH: Varying maturities. Minimum cost $50, $75, $100, $200, $500 and $1,000 denominations.

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