Paying taxes is one of the few things that we cannot avoid.  Whenever you make a transaction or own a property, the government will tax you as they see fit.  For savers, taxes on savings are a bane on their financial future.  With the snowball of taxes on savings accounts, in addition to rising inflation rates, most are discouraged to try and save their money.  In this line of thought, it might be more beneficial to spend your money than save it for the future.  But for people who insist on saving money despite the economic realities, tax exempt saving plans may be the relief that they are looking for. 

Different Tax Exempt Savings

Tax exempt savings are slowly gaining momentum among American and European governments.  With tax free savings, governments encourage citizens to save their money instead of splurging it.  The idea of these policies is to increase the savings rate of the economy and depend less on foreign debt.  Currently, Europe and North America lag behind in savings rates, as compared to emerging economies in Asia like China, Hong Kong, and Singapore.  With more funds at local disposal, the United States can have more local budget sources as they re-energize the economy with domestic debt rather than foreign debt.  

The most common form of tax exempt savings in the U.S. is savings bonds.  A savings bond is an account invested to the U.S. Treasury.  Saving bonds continue to be the most secure tool for long-term savers.  Since bonds are guaranteed by full credit and faith in the U.S.  Government, you do not have to worry about your funds going bankrupt.  You will not be charged with local or state taxes on the interest earned, and charges on federal taxes are deferred until the bonds are redeemed. 

Savings bonds also provide tax shelters for different mechanisms.  For example, taxpayers can get tax exempt saving benefits on federal taxes if you cash out your savings bonds to pay for college education.  This encourages taxpayers to invest on the government and use the earnings on bond investments to re-invest in their education.  The savings bonds conversion is only limited to tuition fees and if you redeem a large amount of bonds, you will not get a full tax exemption.  You can learn more about savings bonds conversion for higher education from Bank Rate's tax tip (http://www.bankrate.com/brm/itax/tips/20010410a.asp?caret=). 

I-bonds And EE-bonds Tax Exempt Savings

There are two kinds of tax exempt savings bonds, I-bonds and EE-bonds.  I-bonds earn you interest while protecting you from inflation.  This means that the real value of your savings will never decrease with inflation, and with the additional tax exemption, you can be certain that you have an absolute increase on your earnings.  To pool money on I-bonds savings, you can pay your contribution through payroll deduction.  I-bonds are sold at face value with an interest earning period of 30 years. 

EE-bond is another type of tax exempt savings bond.  Unlike I-bonds that adjust interest rates according to inflation, EE-bonds use market interest rates.  You can also pay your contributions through a payroll deduction plan.  The current fixed rate for EE-bonds is 1.40% until October 2008.  EE-bonds operate on a variable market based on returns, and its paper bonds are sold at half the face value. 

Tax Exempt Savings Advantages And Disadvantages

Despite the label of these plans, tax exempt savings are not for everyone.  You have to contend with the advantages and disadvantages of these investments just like any other financial tools.  Tax exempt savings will give you tax free interest on competitive rates.  They are relatively secure compared to other financial instruments.  Most of all, you do not get the bad feeling of double jeopardy on your taxes.  Some people do not like the fact that they are taxed twice for the money that they worked hard for; the tax on income, and the tax on savings that comes from your income. 

Tax exempt savings plans are not appropriate for people who want to have a regular income from their savings, since these bonds cannot be tapped easily.  Other financial options offer higher interest rates that no amount of tax exemptions can match.  It is best to consult your financial adviser regarding the different kinds of tax exempt savings. 

If you want to save money for the long term, tax exempt savings bonds are a very attractive option.  The U.S.  Government’s guarantee practically means that you will get paid no matter what.  Plus, you get additional tax shelters on top of the tax breaks given to you on earned interest.  If you start early, tax exempt savings will help you secure your future, whether you are saving for college or for retirement.