Thursday, February 3

TreasuryDirect makes buying U.S. savings bonds easier

MIKE MILES

Federal Times

Saving a little for the long haul is as easy as going online.

Investors can open accounts directly with the U.S. Treasury Department, have money deposited by payroll deduction, then buy Series EE or I savings bonds in amounts as small as $25.

While savings bonds are available through payroll deduction and banks and savings and loan associations, the Treasury Department now makes it possible for employers to deposit payroll deductions directly into an individual's TreasuryDirect account.

The employee can control how the money is invested. This service makes it easier and less expensive for employers to offer payroll deduction but also provides employees with greater control over their investments.

TreasuryDirect is part of the Treasury Department's effort to modernize the way people buy U.S. savings bonds and Treasury securities.

Under the traditional system, employers had to maintain employee money earmarked for savings bonds in trust and then purchase bonds in paper form, keeping records of it all. The new system makes the process as easy for the employer as any other direct deposit transaction. It also passes buying the bonds to the employee.

The process works like this:

- Go online to www.treasurydirect.gov and open a TreasuryDirect account.

- Ask your employer to withhold a specified amount from each paycheck. Then provide the employer with the account and transit routing number for the account and instruct the employer to deposit money directly to the account.

- Check on the deposit, which is held in a non-interest-bearing account called a certificate of indebtedness, pending investment or disbursement.

- Then invest through the TreasuryDirect Web site.

To open a TreasuryDirect account, a participant must be at least 18 years old, have a Social Security number, a driver's license or state identification number, and an active checking or savings account.

Money may be deposited to the account by direct deposit, either from your employer or from a designated bank account. You may designate more than one bank account on your TreasuryDirect account and specify which account you wish to use for each deposit.

When you sell, the proceeds are deposited either to your bank account or held in the certificate of indebtedness account.

At the moment, only Series EE and Series I savings bonds are part of TreasuryDirect. Eventually, the Treasury Department plans to add the capability to trade Treasury notes, bills, bonds and Treasury inflation protected securities, also called TIPS.

Participants can schedule automatic purchases up to five years in advance. All savings bonds are held electronically rather than paper form, and purchases can be made for at least $25 up to the annual maximum, now $30,000 a person for each series.

Another interesting feature of the TreasuryDirect account: Its owner may purchase bonds with a variety of registrations. So in one account, you can purchase bonds as sole owner, joint owner or in the name of a dependent child. The account also calculates the current value of holdings and tracks and reports any taxable transactions that occur during the year.

As an individual investor, keep a few things in mind before using TreasuryDirect:

- TreasuryDirect accounts are not good places to park cash. Unless invested in EE or I savings bonds, the money does not earn interest. Leaving cash balances in your account means you're losing ground to inflation. To avoid the problem of undirected money, preselect how you want the cash invested.

- Payroll deduction is a great way to save. The money is saved before you ever get your hands on it.

- No maintenance charges or transaction costs are levied for purchases and redemptions made in a TreasuryDirect account.

- The Series EE and I savings bonds now available through TreasuryDirect can be an attractive part of a portfolio, particularly if the proceeds are used for qualified education expenses like your children's college education. Interest is exempt from state and local taxes, and you can defer paying federal taxes until you redeem your bonds.

- Savings bonds are considered long-term investments. You can't cash in the bonds for a year, and if you redeem them during the first five years you'll forfeit some interest. But because interest rates are adjusted every six months, you won't be locked into an outdated rate. If the economy improves, inflation accelerates and interest rates rise, savings bond rates will go up, too.

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(Contributing: Sandra Block, USA TODAY. Mike Miles is a certified financial planner and registered employee benefits consultant in Vienna, Va.)

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About U.S. savings bonds

These days, investors can buy two types of U.S. savings bonds, guaranteed government securities that can earn interest for up to 30 years and are exempt from state and local income tax.

They come in eight denominations - $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000 - and can't be redeemed until at least 12 months after they've been bought. If you cash them before five years have lapsed, you'll lose three months interest as a penalty. But if you use them as part of a plan to save for college, you could be exempt from federal income tax on the interest when you redeem them.

Series I bond: This bond prevents your earnings from being eroded by inflation. Buy an I bond at full face value, and it accumulates interest monthly based on a fixed rate that the stays the same for the life of the bond and an inflation adjustment that the Treasury Department updates every six months.

Series EE bond: This bond is issued at half of its face value and is guaranteed to reach face value in 20 years but earns interest up to 30 years. Like I bonds, Series EE bonds accumulate interest monthly that is compounded semiannually. Every May 1 and Nov. 1, the Treasury Department announces the interest rate for Series EE bonds for the next six months.

Some bonds aren't issued anymore but are still earning interest for people who purchased them in the past. Series E bonds issued May 1941 to November 1965 stop earning interest 40 years from the date of issue. Series E bonds issued December 1965 and later stop earning interest 30 years from the date of issue.

Series H and HH bonds also aren't sold anymore. This savings bond does not increase in value. Instead, every six months an investor receives an interest payment by direct deposit to his or her bank account. When you redeem a Series H or HH bond, you receive only its face value. Depending on when the bond was issued, it earns interest from 20 to 30 years.

Source: U.S. Treasury Department