Should I reinvest my Savings Bonds in an annuity?

Thursday, March 23rd, 2006
Categorized as: Savings Bonds and competitive investments

I have six $10,000 EE bonds purchased in 1995, 96, and 97. Would it be worth my while to cash these bonds in and purchase an annuity?

Tom’s response

Your Savings Bonds have some of the lowest rates paid by Savings Bonds, so it makes sense to look at alternative investments. Here are a few things to consider.

The value of your Savings Bonds is probably about $45,000 and about $15,000 of that is interest that you’ll have to report as income if you cash these all in at once. If there’s any chance your tax bracket might be lower in the future, that’s a reason to keep the Savings Bonds.

On the other hand, if your tax bracket isn’t going to get any lower any time soon, that’s a reason to think about cashing in your Savings Bonds, holding back enough for taxes, and reinvesting the rest.

The trick is finding something that pays higher rates without taking on more risk than you can handle. Since you’re thinking about an annuity, I’m going to assume this is money that you can’t afford to lose and that you need a low-risk investment.

However, I’m not fond of annuities and you can find out why in my article on annuities versus Savings Bonds.

That leaves you bank certificates of deposit, government bonds, and government bond mutual funds.

There are several differences between these investments and the Savings Bonds you have. One is that you can defer income tax on your Savings Bond interest, which is a feature that the other investments (annuities excepted) don’t offer. On the other hand, if you are in a very high tax bracket, you could benefit from a mutual fund that invests in income tax-free securities.

Another difference is that the interest rates your Savings Bonds pay adjust every six months, while the alternative investments have fixed rates. If interest rates go up, the Savings Bonds will perform better. If interest rates go down, the alternative investments will perform better.

The Savings Bonds you have pay more than new Series EE bonds, but a final alternative you could consider is to switch to Series I Savings Bonds, which have historically outperformed Series EE bonds.

A final thought – if you’re thinking of switching to an annuity in order to get monthly income, you can accomplish that with Savings Bonds, too. For more information on this, see my post on how to collect monthly payments of Savings Bond interest.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


[…] Should I reinvest my Savings Bonds in an annuity? […]

On April 26th, 2006 Weiwen said:

variable annuities may be appropriate if you’ve maxed out your 401k and your IRA, and you still need to save for retirement – not likely. if you have savings bonds you want to redeem, contribute to your roth IRA or your 401k. they are very, very safe investments, though. if you have I bonds with a good fixed rate, I’d hang on, and be a bit more aggressive with the equity portion of my retirement savings.

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June 1, 2010

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Tom Adams

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