U.S. Savings Bonds have long been considered a safe form of investment, and the interest returned is higher than for most savings accounts. For long-term financial goals, U.S. Savings Bonds are one of the best saving alternatives. Before decided about investing in U.S. Savings Bonds, it’s a good idea to learn something about how they work and what types of bonds are available.
A U.S. Savings Bond is a security issued by the U.S. Treasury Department. Savings Bonds are registered and non-marketable, meaning they are owned by the person named on the bond and can only be bought and sold by authorized agents. They are backed and insured by the U.S. Government. The principal and interest from Saving Bonds cannot be lost due to financial market fluctuations, and they can be replaced if lost, stolen or destroyed.
There are some great tax benefits associated with investing in U.S. Savings Bonds. Interest returned from a bond is free from all state and local income taxes. Federal taxes on interest can be deferred until the bond is redeemed (cashed in). Some types of bonds may be free from all federal taxes if the proceeds are used for educational purposes. This makes U.S. Savings Bonds a good college savings strategy.
There are currently 2 types of U.S. Savings Bonds available: EE Bonds and I Bonds.
EE Bonds have been available since 1980. They are purchased for ½ of their face value (i.e., a $100 bond costs $50) and are designed to reach face value approximately 17 years after the date of purchase, after which interest continues to accrue. The interest rate and redemption rules for EE Bonds vary, depending on the year of purchase of the bonds. EE Bonds are available in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000.
I Bonds have been available since 1998; they were designed to protect investors from inflation. At the time of purchase, a fixed interest rate is established for the bond and is in effect until redemption. Earnings are calculated by applying the fixed interest rate and a semiannual inflation rate. I Bonds are purchased at face value and are available in denominations of $50, $75, $100, $200, $500, $1,000, and $5,000.
Both EE and I Bonds cannot be redeemed until at least 12 months after the date of purchase, and if you redeem before 5 years, there is a penalty equal to the most recent 3 months of interest. Both types of bonds will continue to earn interest for 30 years from the date of purchase.
Any U.S. citizen or legal resident with a valid Social Security number can purchase U.S. Saving Bonds. EE and I Bonds can be purchased at banks and financial institutions, and through employer-offered Payroll Savings Plan and the U.S. Treasury Department’s Easy Saver Plan.
U.S. Savings Bonds are a reliable, low-risk way to save money for long-term expenses, such as education and retirement. Savings Bonds make wonderful birthday and graduation gifts. Backed by the full faith and credit of the U.S. Government, they are a safe alternative to low-paying passbook savings accounts.