Understanding Savings Bonds
Youâre no dummy. You know things. But few people fully understand US savings bonds. Theyâre something our grandparents bought for us once when we were three years old. What are savings bonds and what can you do with them?
US savings bonds can be a very safe investment, but the returns are low. Expect a return of less than 1% annually. Keep your eye on the current interest rates if you decide that savings bonds are of interest to you.
Learn more about savings bonds:
- US savings bonds are debt instruments. Have you ever noticed that the national debt grows each year? The federal government spends more than it receives in taxes. Savings bonds are one way the government addresses this shortfall. They borrow money from those that purchase bonds and pay them back, with interest, at a later date.
- Bonds used to be paper based, but are now electronic. Paper savings bonds were discontinued in 2012. Electronic savings bonds are available for purchase online. You must have a TreasuryDirect account to purchase savings bonds. https://www.treasurydirect.gov/RS/UN-AccountCreate.do
- One class of savings bonds, I Bonds, can be purchased in paper format with your tax refund. I Bonds can also be purchased in electronic format.
- There are two types of savings bonds. Both bonds accrue interest which is paid when the bonds are redeemed. The interest is compounded semiannually.
- Type EE bonds. These bonds pay a fixed rate of interest if purchased before May 2005. EE Bonds issued after that date pay a variable rate. The rate is 90% of the six-month average of five-year Treasury Security yields.
- Type I Bonds. I Bonds provide a fixed return and an inflation adjustment based on the consumer price index.
- Thereâs a limit to how much you can purchase. You canât purchase more than $10,000 total of either type of electronic bonds per social security number. But you can purchase up to $10,000 in electronic I Bonds and up to $5,000 in paper I Bonds.
- Electronic bonds can be purchased in any amount of $25 or more. You can purchase an electronic bond for $147.43 if you like.
- The bond can be redeemed after 12 months. While interest is earned monthly, it is only compounded twice per year. Bonds canât be held for more than 30 years.
- There is a penalty for redeeming the bond within five years of purchase. You forfeit the last 3 months of interest unless the bond is at least five years old. Savings bonds can be a safe way to transport money into the future. The interest rates paid are so low that most investors wouldnât be concerned with this minimal penalty.
- You still have to pay taxes on the interest. It doesnât seem fair to let the government borrow your money and then be charged taxes, but itâs true. The good news is that you only owe federal taxes. State-level taxes donât apply.
Are savings bonds a good investment? They are certainly a safe investment. The US government is a reliable debtor. You can be certain youâll receive your money. That low level of risk means that youâre not going to receive a great return on your money. Rates have been in the 0.1% – 0.25% range during the last half of 2016.
Now that you know all about US Savings Bonds, decide if the investment is worthwhile for your financial future. Look at your financial goals and determine if savings bonds are a useful tool for your portfolio.