Just the facts, and nothing but the facts.
Americans seeking to unload low-yield certificates of deposit and money-market funds want some straight answers on replacement choices. Nothing fancy, just better yields.
One response I give folks on that quest is greeted with bored silence. Another recommendation sends investors excitedly scurrying to mutual-fund directories and literature to do research.
Yet both choices have their place and can fulfill particular investor needs.
Here are those alternatives:
– The Series EE savings bond, not the most exciting of vehicles to most people, guarantees a solid 6 percent a year if you hold on for at least five years. If market rates rise, you could wind up getting even more than that.
Because it`s a good deal compared with competing vehicles, there`s been a 32 percent rise in sales, to $6.6 billion, this year.
Back in 1986 the guaranteed minimum for new Series EE bonds held five years was reduced from 7.5 percent to 6 percent by the government, because the yield was considered too high. At some point, the government might just decide to cut the 6 percent yield on new bonds. It makes sense to buy bonds before that happens, because they`ll still carry that 6 percent guarantee.
– Shorter-term bond funds offer a comfortable, sophisticated transition from certificates of deposit to a higher yield that isn`t as volatile as longer-term bonds. Assets are growing rapidly. While returns are much better than those of your bank or your money-market fund, the value of principal can fluctuate as trends change. Greater yield always carries greater risk.
An investment-grade bond fund recommended by the Morningstar Inc. fund advisory is the Strong Short-Term Bond Fund of Milwaukee, a ”no-load” (no initial sales charge) fund with total return of 13.16 percent over the last 12 months.
Among tax-free municipal investments, the recommendation is Vanguard Limited Term Municipal Bond Fund of Valley Forge, Pa., a no-load fund with an 8.5 percent total return over the past 12 months.
Of course, bond-fund returns will be showing some slippage, just as other returns will, in this declining-interest-rate environment.
In regard to savings bonds, semiannual rates based on 85 percent of five- year Treasury securities yields are announced each May and November. For each period, the rate will vary. For example, it`s 5.58 percent until next November.
If you hold your new bond five years and accumulated market-based rates are higher than the guaranteed minimum payout, you get that higher return instead.
Meanwhile, for a savings bond held just six months, the rate is now 4.16 percent, much better than six-month Treasury bills.
There`s no taxation until bonds are redeemed. Savings bonds don`t pay cash interest, but you can redeem them at a bank for cash. You should, however, be willing to hold at least six months, because interest is credited every six months. There`s a maximum purchase of $15,000 annually per person.
For people in the proper brackets, savings bonds also offer help to those with children headed for college.
The education savings-bond program permits qualified taxpayers to exclude from their income all or a portion of interest earned on Series EE savings bonds purchased after Dec. 31, 1989.
To qualify, bond proceeds (principal and interest) must be used to pay tuition and expenses of the taxpayer, a spouse or a dependent at educational institutions. Postsecondary institutions, including vocational schools that meet standards for federal financial-aid programs, qualify.
There are income restrictions. The full interest exclusion is available for married couples filing joint returns with adjusted gross incomes of $66,200 or less or for single filers with adjusted gross incomes of $44,150 or less. There`s a phaseout of benefits for joint filers with incomes of $66,200 to $96,200. For single filers, the phaseout is between $44,150 and $59,150.
The bond must be registered in the taxpayer`s name alone or in the name of the taxpayer and spouse, not in the dependent child`s name. The taxpayer must be at least 24 years old before the issue date of the bond.
Even if you don`t qualify for the deduction, savings bonds make good sense as a tool for education investing. Overall, they provide a straight answer to today`s investment quandary.
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Andrew Leckey`s column appears Sunday, Monday and Thursday.
