Are bonds treated like a 401K?

Question

Is the money I use to pay for bonds taxed in the year I earn the salary? If so, what is the benefit of buying bonds?

Answer 1

I'm assuming that you are talking about buying US Savings Bonds through your payroll savings plan?

Unless the plan is specifically set up as a 401k, the money you get deducted is treated as taxable income in the year earned. Possible benefits: if you have maxed out your 401k deferral ($15,000 in 2006 for those under 50), this is an additional forced savings vehicle. Savings bonds have the advantages of being tax-deferred until you cash them (that is like a 401k), they are free of state income tax if your state has an income tax, and if you meet certain requirements later on, you may withdraw the money and interest federal tax-free to use for children's higher education expenses, finally they are risk free, and you can withdraw before age 59.5 without penalty.

Most experts suggest that you 1) make the minimum 401k contribution to get the employer match, then 2) fund your IRA, then 3) max out your 401k contribution, then look for other investments.

Answer 2

If I understand this correctly the benefit to you is that you can sell your bonds (assuming this a payroll deduction to buy US saving bonds as I have with my employer) at any time would would only have to pay taxes on what you earned. If you sell anything from a 401k prior to retirement you will be hit with a 10% tax penalty on top of the taxes for income you will have to pay. I would need more information to explain more differences.

Answer 3

most bonds work the opposite of the stock market - kinda like a hedge against your stocks