529 Plan and College Savings

Archive for March, 2007

Question: what is the difference between treasury bills notes bonds and tips compared to savings bonds?

want to know what is better for saving and differences between treasure bills,notes,bonds,tips or EE/E savings bond for 10year child for college or just a vehicle to save for when she graduates high school
this would be for to use as she see fit when she graduates from high school either for college or whatever

Answer: EE bonds pay terrible interest rates. But for that matter neither are bills, notes, bonds, or tips either. Now for the differences.

EE bonds can be bought in small denominations. You have to hold them a certain amount of time prior to cashing them in without a penalty. $25, $50, etc. T-bills are short term borrowings by the government. 3 mo, 6 mo, and recently 1 year. Sometimes even shorter periods. They are sold at a discount to face value and when the mature you are paid face value. You buy them in $1000 denominations but you only pay the discount, maybe $993 or so depending on current interest rates. Notes are shorter term bonds. I forget the exact term of notes. It might be up to 10 years. They are also sold in $1000 increments. But with notes and bond you pay face amount. Interest is paid twice annually. Interest on EE bonds is not paid until maturity. Bonds are like notes except they have a longer maturity–20 years.

TIPS have an interest rate and an inflation adjustment. They are sold in $100 denominations. They need to be approached with caution because the government taxes the inflation adjustment annually but do not pay the adjustment until maturity. Real cute of them–taxing something that does not exist.

Another alternative is I bonds. They are like TIPS but different. They can be purchased in small amounts $25. The interest and inflation adjustment is paid when you cash them in. You are not taxed on the inflation adjustment until it is received unlike TIPS. The current rate is worse than pathetic. It is criminal–0.10% EEs pay 0.7% with no inflation adjustment.

Beloit College Money Saving Tips