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We are still about 2 years from purchasing a home and have been using a good ol' savings account with a incredible return rate of 0.80%!

Is there any investment avenue where we can get a better yield without assuming the risk of volatile stocks and bonds?

I was contemplating Muni bonds, with their low risk, and high(er) interest rates, but given our relatively short time frame, would these be a good option?

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  • Welcome. A good question to ask. Once I added some more tags I think the answer is in the related questions. money.stackexchange.com/questions/5117/… Please keep asking questions, we'd love to help.
    – MrChrister
    Aug 20, 2012 at 15:47
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    Alas. There is no low-risk high-reward option these days. Thank your central bank! As for municipal bonds, you probably shouldn't think of those as ultra-low-risk options. There is some risk there. In particular, recent headlines suggest that Warren Buffett thought they were risky enough to stop offering insurance on them, and this may be a red flag. See: online.wsj.com/article/…
    – user296
    Aug 21, 2012 at 0:04

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One option is I Savings Bonds, sometimes just called I Bonds. The basic mechanism is that there is a fixed rate set when you buy the bond, and an adjustable rate that changes every six months to reflect CPI. They stop paying you interest after 30 years, but you can redeem them at any time after one year.

The major advantages:

  • There is very little risk. The inflation adjustment eliminates inflation risk. You can trade them only with the US Treasury, so there is no risk of capital gains or losses. They are Treasury bonds, so there is as little creditor risk as can exist.
  • They are taxed advantaged. You can elect to postpone taxes until you redeem them, and taxes are completely eliminated if you use the proceeds for favored activities.
  • They are almost perfectly liquid. You can redeem them at any time after one year.

The major disadvantages:

  • The current rates are only mildly better than other rates. The current fixed rate is 0.00%. The current adjustable rate is 1.10% for six months. That gives a current annual rate of 2.20%. That is better than you can get elsewhere, but it's still not great.
  • You cannot redeem them for the first year. From one to five years after purchase, there is a penalty of the most recent 3 months' interest. So if you redeem them within five years, your effective rate is less than the advertised rate (but at least it's predictable).
  • You are limited to $5000 per US Taxpayer per calendar year. So it won't cover your entire downpayment, but it might be a reasonable supplement.
  • Treasury is in the process of eliminating paper bonds, so you can now only buy I Bonds from the Treasury Direct website (linked above). I don't own I Bonds, and have never used Treasury Direct, but everything I've heard says that it's very difficult to use.
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Before purchasing our first home, we opened a Roth IRA. Our retirement company offered us a fund with a guaranteed 3% return with the TIAA-Traditional fund. We were able to up to withdraw $10,000 of contributions for our first home purchase without any penalties or fees. The only caveat: I think TIAA-CREF is only available to certain people employed by hospitals, schools and non-profits. If you're not a member, perhaps other retirement organizations have a similar fund to the TIAA-traditional.

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    For a Roth, deposits may be withdrawn anytime. If any of that $10,000 was gain, not deposits, tax, but not penalty, is due for withdrawals.
    – JTP - Apologise to Monica ♦
    Aug 20, 2012 at 16:52
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    aka, the first $10,000 of contributions is not penalized or double taxed. After 5 years, you can withdraw gains penalty free for a first time home purchase.
    – Pete
    Aug 20, 2012 at 17:37
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    fairmark.com/rothira/first.htm - correct, Pete, actually after 5 years, up to $10k in gains would avoid tax.
    – JTP - Apologise to Monica ♦
    Aug 20, 2012 at 20:44

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