NO NO No, this is totally false. There are numerous differences between investing in savings bonds and investing in a 401(k).

1). Savings bonds are free of state and local taxes by federal law and 401(k) withdrawals are NOT. Although and importantly, some states exempt a certain dollar amount of withdrawals from retirement accounts from state income taxation, depending on the withdrawer's age.
2). Premature withdrawals (prior to age 59 1/2) from 401(k)s are subject to a 10% penalty based on the entire withdrawal (subject to several exceptions, but the exceptions apply only to the penalty and taxation remains!), whereas premature redemptions (prior to 5 years from the month of purchase) of savings bonds are subject to a penalty of 3 months' interest (NO exceptions).
3). Contributions to 401(k)s are deducted from current INCOME, not current TAXES (bseller is confusing a tax DEDUCTION with a tax CREDIT; not the same thing at all), while purchases of savings bonds have no effect on income taxes at the time of purchase.
4). You cannot choose to report the increase in value of a 401(k) on a current basis, whereas you can with savings bonds.
5). Interest on savings bonds can be free of income taxation if used for educational purposes under certain circumstances, whereas 401(k) withdrawals NEVER are.
6). Savings bonds allow the holder to choose between tax deferral or current taxation and this valuable option is NOT available with 401(k) plans.
7). There are zero transaction costs involved with savings bonds. There are zero ongoing fees. There are zero bogus marketing costs (= "12-b1" fees that you have with some mutual funds in 401(k) accounts).
8). The value of EE savings bonds increases monthly, the value of I savings bonds adjusts monthly (possibly downwards in the case of deflation, although this has never happened YET), and the value of 401(k) assets fluctuates daily.
9). When one decides to redeem savings bonds, one knows with certainty how much one will get, whereas if one redeems 401(k)assets, one is at the mercy of the daily closing price, which is ALWAYS UNKNOWN at the time the redemption decision is made.
10). You can't get frequent flyer miles for 401(k) contributions but you can if you buy savings bonds with a mileage earning credit card.
11). You can't get any interest-free float on 401(k) contributions (in fact, the opposite occurs in most situations), but you can with savings bonds purchased with a credit card.
12). You can walk into any bank in any town and redeem savings bonds for immediate cash. Try that with your 401(k) = NOT.
13). You have to have earned income to contribute to a 401(k) plan; not so with savings bonds.
14). Even if you do ELECT to pay tax on redemption of savings bonds, the taxation is only on the increase in value. Every dollar withdrawn from a 401(k) is taxed, even if it has DEcreased in value (of course, you do get an up-front reduction in taxable income when you contribute to a 401[k] and you don't with savings bonds.)
15). Under certain circumstances, you can borrow against a 401 (k) account (although this is seldom a good idea IMO) and you can't do that with savings bonds.
16). 401(k) assets receive preferential treatment (cannot be seized) in bankruptcy in many states (most states I think, but would not swear to it and am not an attorney), whereas savings bonds do not.
17). You must begin to make mandatory minimum distributions from 401(k) accounts starting no later than age 72 and this is not the case with savings bonds.
18). You can buy up to $45,000 worth of savings bonds per social security number per year and this is the same for everyone; the limitations on 401(k) contributions depend on many factors and basically are different for each person. But, for the average person, the 401(k)limit will be far lower than $45,000.

And, to answer a previous poster, you might want to elect to report the interest income currently if you expected to be in a higher tax bracket in future years, compared to the bracket you are in right now. For example, you are in graduate school, you are a commissioned salesperson having a slow year, you have a large casualty loss, or many other possible scenarios.

BSeller, a very dangerous and inaccurate post!

Doakes

[This message has been edited by JoeDoakes (edited 07-10-2002).]

[This message has been edited by JoeDoakes (edited 07-10-2002).]