Wednesday, September 29, 2010

Pathetic Return

We will continue to keep a portion of our savings in U.S. Government debt. However, the returns on Treasury bills are pathetic. Last week our 90-day $10,000 T-bill earned a grand total of $3.41, less than a latte at the coffee shop. That's not one percent (1%) per year but closer to zero-point-one percent (0.1%).

A better return for the same risk can be earned through U.S. Savings bonds. We bought some many years ago for the kids and also received a few as gifts. Savings bonds are physical instruments with all their attendant risks. Owners have to keep track of them, and replacing lost or destroyed bonds can be a hassle. However, the rate differential over T-bills may be worth the trouble.

Savings bonds also are more flexible with regard to income taxes. The entire accumulated interest over the years is recognized when they are redeemed, which may not be painful if they are cashed out in a low-bracket year. Alternatively, a taxpayer can elect to recognize interest annually on the tax return, which can be useful in the case of a child who has little income but who will redeem them as a taxpaying adult. Every year we've been attaching a list of savings bond interest to our son's tax return, accompanied by the following statement:
Pursuant to IRC Section 454, taxpayer elected for the 19xx and later tax years to treat as income during the current year the increase in redemption price of U.S. Savings Bonds.
Yes, that's a hassle, too, but I'm sure he'll thank me for that later :)

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