I’m a Financial Advisor: Why 2024 Is the Year To Invest In Savings Bonds
Written by
Cynthia Measom
Edited by
Amber Barkley
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With economic uncertainty and market volatility, 2024 is shaping up to be an ideal year to consider savings bonds. These bonds offer the security of government backing, potential for steady returns and even tax advantages that make them an appealing option for many investors.
Of course, all investments come with drawbacks — but here’s a financial advisor’s take on why 2024 is a good year to invest in savings bonds and which ones he recommends.
Why Is 2024 a Good Year To Invest In Savings Bonds?
Tyler Weerden, financial planner and founder at Layered Financial, said, “2024 is a great year to buy bonds if you need an income-producing asset without a lot of volatility.”
He explained that not too long ago, investors and money managers were complaining about TINA — aka There Is No Alternative. He added that, as a result, the Federal Reserve responded to the COVID-19 pandemic by slashing interest rates, which drove down bond yields and savings account interest rates.
“Even before the pandemic, investors were shuffling money around between different high-yield savings accounts (HYSAs) to simply try and get a 1% return on their cash,” Weerden said. “With cash and bonds earning so little interest, the conversation turned to stocks being the only investment alternative.”
However, said Weerden, in the recent inflationary environment coupled with the Fed’s efforts to cool inflation via a series of interest rate hikes, TINA is no longer an issue.
“Investors can now easily earn 4%-5% through money market mutual funds, HYSAs and bonds,” he said. “Investors saving for short- to medium-term goals or [who are] looking to build a balanced portfolio should seriously consider investing in bonds versus parking cash in CDs or bank savings accounts due to the tax benefits and typically higher yield.”
How Do Savings Bonds Compare to Other Savings Vehicles?
“Bond volatility is lower, and therefore the return is lower,” Weerden explained. “This isn’t inherently good or bad, it really depends on why the investor purchased the bonds. Notice I said bond volatility is lower, not bond risk is lower. Two investors could hold the exact same bond, but to one of them, it’s risky, and to the other, it’s risk-free. How is this possible? Inflation.”
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Weeden said that for a 20-year-old, buying bonds for long-term retirement goals 40 years down the road is most likely not an optimal choice.
“They need to be invested in inflation-fighting assets, typically stocks and real estate,” he said.
However, he said that a 60-year-old buying bonds for portfolio stability and income makes much more sense.
“Let’s say you bought a 10-year bond paying 5% with a face value of $1,000,” he suggested. “Over the 10-year period, you received $50 [a] year, but that $50 became less and less valuable as inflation crept up. Assuming a 3% inflation rate, having $50 10 years from now is like having $37 today. Inflation is a serious risk for investors with a long time horizon, even when cash or bonds are paying a nominal 4%-5%.”
Which Savings Bonds Should You Invest In for 2024?
Weerden said that if an investor is looking for principal protection, income generation and tax advantages, U.S. government bonds are a good option over corporate bonds.
“Corporate bonds may pay a little more, but you’re adding risk and getting less tax benefits,” he explained. “U.S. government Treasuries are exempt from state and local tax. Bond funds that hold U.S. Treasuries may also have a portion of their interest paid tax-free, depending on the exact composition of the fund and which state you live in.
“Municipal bonds, often referred to as ‘munis,’ are typically exempt from both federal, state and local tax if purchased by a resident of that state. This is why muni interest rates are typically lower than regular bonds. Corporate bond interest is taxable on both the federal and state level.”
Weeden said that taxes on bonds only apply if your bonds are held in a taxable account. He added that you should remember that you pay taxes annually on interest, dividends and capital gains within taxable accounts.
“If your bonds are held in tax-advantaged retirement accounts, such as the Federal Thrift Savings Plan (TSP), 401(k), 403(b), 457(b) or an IRA, you won’t pay tax on the interest annually,” he said. “Instead, you’ll pay ordinary income tax — federal and state — when you distribute money from those accounts, unless you’re making a qualified distribution from a Roth account.”
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