A number of factors have to come together to make replacing your online savings account with a TreasuryDirect account, not only a good financial decision, but a practical one. TreasuryDirect is the online service that enables American to buy savings bonds online.
To see a list of high yielding CDs go here.
I Bonds pay an interest rate which fluctuates with inflation. If inflation averages 2.2% over the next few years, the I bond will provide a rate of return that is double high yielding savings accounts. Off course, if inflation hits 4 or 5 % like some predict, the return on the savings bonds could be 4 or 5 times a savings account.
EE Bonds currently pay more interest than a typical savings account, but not high-yield savings accounts. However, the yields on high yielding savings accounts tend to drop dramatically after the first year you have the account, making EE Bonds more attractive over the long term.
Lets deal with the practical issues of using savings bonds instead of a savings account. The purpose of a savings account is to provide immediate access to cash as needed, but not for frequent transactions. Using TreasuryDirect, you can redeem bonds (EE or I saving bonds) online and receive cash in your bank account in one business day.
You cannot redeem savings bonds that are less than a year old. This is the major drawback to parking your cash in savings bonds. If this is an issue, we suggest putting in regular small amounts to build up the amount of “redeemable” funds.
Bonds that are less than five years old have an early redemption penalty of 3 months interest. However, the difference in returns for I bonds should more than make up the difference.
With Treasury Direct, you can select individual bonds for redemption. You can also choose to redeem a portion of a bond, provided that you redeem more than $25 worth, and the remaining value of the bond is more than $25.00. These choices are useful in two ways:
Buying savings bonds through Treasury Direct gives you the convenience of having quick access to cash, but pays a better rate of return. While I Bonds are better investment products, there is a $10,000 per year purchase limit. This may lead you to buy both I Bonds and EE bonds.