Government Savings and Investing Products

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At a time when the U.S. stock market and currency investments have become volatile and unpredictable, a conservative-minded or risk-averse individual might go in search of safer investment alternatives.

In some schools of thought, U.S. Government-backed investment options might be the right place to look.

As an investor, you need to go through the process of reconciling your faith in an entity or investment with your desire to invest in that entity or add the asset to your investment portfolio.

If your investor risk tolerance is low and you have full faith in the Federal Government and economy, then government securities and debt instruments will check all the right boxes.

Still, the question remains, which savings and investment product will best meet your needs?

U.S. Treasury Investment Products

The following information will focus on six types of U.S. Government securities, how they work, and what kind of returns they generally provide.

1. T-Bills

Treasury bills or T-Bills are short-term, low-risk, secure investments. The Treasury issues the T-Bill as U.S. Government debt backed by the Treasury.

Generally, T-Bills are sold through competitive and non-competitive auctions for the purpose of raising short-term cash to cover government shortfalls.

Note: Non-competitive bids = price is determined by the average of all competitive bids received.

For the most part, T-Bills are sold in increments of $1,000 at a discount to the general public or institutional investors. In larger auctions, institutional investors can purchase T-Bills with a face value as high as $5 million.

The maturity dates can range from a few days up to 52 weeks. The further out the maturity date, the higher the interest rate will be. At maturity, investors are paid the face value of the T-Bill.

While investors purchase T-Bills at a discount, they redeem them at par value, the difference being the interest earned.

The interest income earned from a T-bill is exempt from state and local income taxes, but you must pay federal income tax.

2. U.S. Savings Bonds

U.S. savings bonds are debt securities issued by the U.S. Treasury. Of all the government investment instruments, savings bonds are generally considered to be the safest investment in ‘level of risk’ terms because the U.S. Government backs them. 

The bonds are available in increments of pennies (min $25 per year) with an annual limit on the amount that can be purchased.

The yearly limit for electronic savings bonds is $10,000, while the limit for paper savings bonds is $5,000. Maturities can range from 1 year up to 30 years.

There are two types of U.S. savings bonds:

  • Series EE U.S. Savings Bond: Sold at face value with a fixed interest rate to be paid at redemption or maturity. Interest is accrued quarterly.
  • Series I U.S. Savings Bond: Sold at face value with a variable interest rate indexed to inflation to be paid at redemption or maturity.

Interest is accrued quarterly.

Note: If an investor chooses to redeem a Series I within the first five years, they will be assessed a 3-month interest penalty.

Similar to T-bills, you won’t have state or local tax on the interest earned on a savings bond. You’ll generally pay federal taxes when the bond is redeemed unless it is used for qualified higher education expenses.

3. Treasury Notes

Treasury notes are categorized as U.S. government debt securities. They’re considered a safe long-term investment backed by the U.S. Government and are issued with maturity dates ranging from 2 to 10 years.

The interest rate is fixed and set when the notes are issued. Unlike some other types of U.S. debt securities, interest is paid on T-notes every six months.

T-notes can be purchased in competitive or non-competitive auctions. Investors can also purchase them on secondary markets at face value, a discount, or a premium, depending on where interest rates are at the time of purchase.

Once a T-note matures, the U.S. Treasury repays the note to the holder at face value.

You won’t pay state or local taxes on interest earnings for treasury notes. To help you plan for federal taxes, you can specify online the percentage you would like withheld, up to 50% of interest earnings.

4. Treasury Bonds

Treasury bonds are yet another form of government debt securities. The Treasury issues them to create working capital for the U.S. Government and repaid with tax collections.

The maturities on Treasury bonds range from a minimum of 20 years to a maximum of 30 years. Interest rates are fixed and set when the original bond is sold to the public, and interest is paid on T-bonds every six months.

When purchasing T-bonds directly from the Treasury, investors must buy them in minimum increments of $100.

The Treasury will sell T-Bonds in competitive auctions at face value. The maximum purchase at a competitive auction is $5.0 million.

They’re also available to investors on secondary markets at face value, a discount, or a premium, depending on where interest rates are at the time of purchase.

When a T-bond hits maturity, the bondholder can redeem it at face value.

Tax treatment on interest is the same as the other treasure products listed above. For each product, you’ll also receive a Form 1099-INT.

5. Treasury Inflation-Protected Securities (TIPS)

Treasury inflation-protected securities or TIPS are a type of Treasury security issued by the U.S. government.

They’re available in increments of $100 with maturities of 5 years, ten years, and 30 years. TIPs are sold at Treasury auctions at a fixed interest rate to be paid every six months.

While TIPS are very similar to T-bonds, there’s one significant difference.

When a T-bond matures, the holder can redeem it at face value. With a Treasury Inflation-Protected Security, the face or par value of the security goes up in years when the inflation rate increases.

The annual Consumer Price Index or CPI determines the increase amount. 

When the holder goes to redeem a TIPS at maturity, they’ll receive that total value of the security, adjusted for inflation. This ensures that the security always maintains its value to the investor.

Note: should a TIPS’s value dip below the original face value of the TIPS, it will be redeemed at the higher value.

You’ll pay federal tax on interest income and growth in principal, but you won’t have to pay state or local income taxes on this product. 

6. Floating Rate Notes (FRNs)

A floating-rate note (FRN), also referred to as a “floater,” is a debt instrument with a variable interest rate. What makes floaters different from other U.S. debt instruments is it’s issued without a stated fixed interest rate.

Instead, the stated interest rate will be a variable rate tied to a key benchmark. Possible benchmarks include the LIBOR rate, the rate paid on money market accounts, or the Fed Funds rate.

Floaters are available through auctions and on secondary markets. Very few things associated with floaters are static.

Interest rates can be adjusted at any time based on what the security dictates at issuance, and the changes are made based on predetermined “reset dates.”

Interest payments can be issued monthly, quarterly, semiannually, or annually, depending on what’s stated on the security. FRNs from the U.S. Treasury pay interest quarterly.

In terms of interest rates, FRNs come with a little more risk. Should interest rate indexes go flat, investors would not receive interest payments.

Conversely, a rise in inflation and, subsequently, in interest rates would reward the investor with more significant interest payments.

Interest is also subject to federal tax but is exempt from state or local tax.

Making an Investment Decision

As you can see, when you’d like your money in something other than the stock market or everyday savings accounts, investing in U.S. Government securities comes with many options.

As an investor, you must determine which option from the array of investment products best serves your needs.

To do that, you must first decide what level of investment risks you’re willing to accept.

T-notes and T-bills will probably be the right choice if you are genuinely risk-averse. Floaters would be the right call when you’re willing to accept a little more risk for the potential of higher returns.

Besides risk assessments, you would also want to consider maturity dates (how long you want to tie up your investment funds) and your cash flow needs. If you’re looking for incremental cash flow, you would want to avoid T-bills and savings bonds.


Vicki Cook and Amy Blacklock

Amy and Vicki are the coauthors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.

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