There are many government backed savings options to help you earn interest safely and with minimal risk. Many of these options provide some form of tax benefit and are back by the government which makes them very attractive to conservative investors. Below is an overview of several of the most common forms of government backed savings options and there benefits and how they work.
1. Savings Bonds: A Safe and Secure Investment Option
The U.S. Treasury issues U.S. Savings Bonds as a means of investing in a low-risk environment. As such, all U.S. Savings Bonds have the backing of the U.S. Treasury and are therefore virtually free from risk.
Some of the key features of U.S. Savings Bonds include:
- A very low-risk investment option – U.S. Savings Bonds are issued by the U.S. Treasury and therefore backed by the U.S. government. As such, this option has a very low-risk factor.
- Tax Benefits – Some states do not tax the interest earned on U.S. Savings Bonds. Additionally, the interest earned on U.S. Savings Bonds can be deferred until the bond is redeemed.
- Investment Options – U.S. Savings Bonds can be invested in with smaller amounts and can be held for extended periods of time.
U.S. Savings Bonds are a great option for conservative investors who are interested in earning a steady income with little to no risk.
2. Certificates of Deposit (CDs): A Fixed Return with Little Risk
Banks and Credit Unions issue certificates of deposit (CDs). A CD is a type of savings account that offers a fixed return for a specified amount of time. All deposits made into a certificate of deposit are insured by the FDIC, which reduces the risk associated with investing in a CD.
Some of the key features of CDs include:
- Interest Rate – CDs are an investment where you know exactly what you will receive for your investment. The interest rate is “locked in” for the duration of the term.
- FDIC Insured – All deposits made into a CD are insured by the Federal Deposit Insurance Corporation (FDIC), which protects your initial deposit up to $250,000.
- Predictable Income – With a CD, you know exactly when you will receive interest payments and how much you will receive. Therefore, you can rely on a predictable income stream.
CDs are a great investment option for those who are looking for a stable source of income with little to no risk associated with the investment.
3. Individual Retirement Accounts (IRAs): Tax-Advantageous Retirement Savings
Individual Retirement Accounts (IRAs) are government-backed retirement savings plans that offer tax benefits to promote long-term savings. There are two primary types of IRAs: Traditional IRAs and Roth IRAs. Each of the above mentioned types of IRAs offer different tax benefits.
Some of the key features of IRAs include:
- Tax-Deferred Growth (Traditional IRA) – Your contributions to a Traditional IRA are tax deductible and the funds within your Traditional IRA will grow tax-deferred until you withdraw them.
- Tax-Free Withdrawals (Roth IRA) – You contribute to a Roth IRA using after-tax dollars, however, when you retire you will be able to withdraw your contributions tax-free.
- Annual Contribution Limits – The Internal Revenue Service (IRS) establishes the maximum amount of money you can invest in an IRA annually. However, the annual contribution limit for an IRA is generally greater than that of a traditional savings account.
If you are looking to accumulate wealth for retirement while taking advantage of tax benefits, IRAs are a great option.
4. U.S. Treasury Inflation-Protected Securities (TIPS): Protecting Your Money From Rising Prices
U.S. Treasury Inflation-Protected Securities (TIPS) are government-backed securities that are designed to protect your investment from the effects of inflation. When inflation rises, the principal of a TIP increases accordingly, so that your investment will maintain its purchasing power over time.
Some of the key features of TIPS include:
- Protection from Inflation – As the price level in the economy rises, the face value of a TIP increases accordingly. As a result, your purchasing power is preserved regardless of whether inflation is high or low.
- Very Low-Risk – TIPS are backed by the U.S. government, which means they carry virtually no risk of default.
- Fixed Rate of Return – TIPS pay interest based upon the adjusted principal value of the security. As a result, you can expect a predictable return on your investment.
If you are a conservative investor who wants a low-risk way to protect your investment from inflationary pressures, then TIPS are a viable option.
Summary
There are a variety of government-backed savings options that are available to help you grow your money safely and with minimal risk. Regardless of which savings program you choose, you can rest assured that you are utilizing a low-risk alternative that provides a potential tax benefit. Understanding the options outlined above will allow you to make an informed decision about which option best fits your needs to ensure a financially secure future.
