What is a U.S. Savings Bond?
Savings bonds are known for their ease of purchase, and are available at most banks as well as through payroll deduction offered by many employers. If you’re considering buying U.S. savings bonds as either a gift or an investment, you may be confused as to what the bonds are and how they actually work.
Introduced in 1935 by the U.S. Treasury Secretary, savings bonds were designed to allow the public a way of investing small amounts of money at a time. Although the U.S. government had been offering Treasury securities off and on since 1776, previous security offerings had been marketable and so the value fluctuated as market conditions rose and fell. The new savings bonds offered fixed interest rates and specific redemption values, thus guaranteeing a return on investment.
Because they are backed by the credit of the federal government, savings bonds are considered to be one of the safest investments you can make. Bonds are exempt from state and local taxes, and you don’t pay federal tax on bonds until such time as the bonds are matured or cashed. In addition, because savings bonds are issued by the Treasury Department, they can be replaced if stolen, destroyed or lost.
There are three basic types of savings bonds. Series EE bonds are available in denominations from $25 to $10,000, can be purchased in increments by payroll deduction, in cash at a banking facility or online through the Treasury Department. There is a limit on purchases of $5,000 face value per year. Series EE bonds sell for half of their face value and pay interest for 30 years. Series HH bonds can only be purchased with Series EE savings bonds or Savings Notes at the face value amount, which ranges from $500 to $10,000. With a 20 year maturity, Series HH bonds don’t increase in value and there is no annual limit on investments. Series I bonds are also sold at face value but the earnings are inflation-indexed. Annual limits for Series I bond purchases are $5,000 per year.
Both Series EE and I savings bonds have a minimum term of ownership of one year and earn interest for 30 years; Series H bonds must be owned for a minimum of six months before they can be cashed and earn interest for a 20 year period. All savings bond types have early redemption penalties; if you cash the bond before five years you will lose the interest accrued in the most recent three months. The interest earned on savings bonds is subject to federal tax but exempt from state taxes; bonds are however subject to state inheritance and estate taxes. There is a federal exclusion of taxation when savings bonds are used for educational financing, but restrictions are in effect.
How to Choose a Bond?
Whether you are purchasing U.S. savings bonds to finance education, supplement your retirement income or to simply give as a gift, you may become overwhelmed when it comes to choosing the option that is best for you. When you look at the options, consider if your primary goal is to pay less upfront or to earn more with interest an inflation rate on the back end. Either way, U.S. savings bonds have tax benefits and earn more interest than other savings options.
Research the different types of U.S. savings bonds and determine which one is right for you. There are two types of savings bonds that are available to consumers–the Series I and Series EE. The Series I option is sold at face value and is adjusted twice a year and is indexed to inflation; it earns two parts of returns. One part of the return is the rate that is fixed for the life of the bond and the other part is the rate of inflation. The Series EE is sold at half the cost of face value and the interest is earned at 90 percent of marketable five-year treasury securities’ average return. This option is also reviewed on a semiannual basis.
Determine how much you can afford and are willing to spend. Both the Series EE and the Series I options offer denominations as little as $50 to as high as $10,000. The interest earned is exempt from local and state income taxes and the federal taxes are deferred until the maturity or redemption date. In the event that you need to redeem the bond prior to the five-year term, there is only a small penalty fee and the bond can be redeemed from any financial institution as long as it has been held at least 12 months.
Purchase the bonds through a financial institution, a payroll savings plan or the Savings Bonds EasySaver Plan. The easiest option for purchasing U.S. savings bonds is through your payroll via the payroll savings plan. You can make adjustments to the amount that is taken from your check each pay period and some employers offer the option to allot as little as a few dollars per pay period. If you prefer to purchase the bonds through a financial institution, you can easily visit the institution and purchase them over the counter. The Savings Bonds EasySaver Plan automatically debits your checking or savings account.
Investors looking for a safe and secure way to put money aside often turn to U.S. savings bonds. Unlike stocks and corporate bonds, U.S. savings bonds like the Series EE are backed by the full faith, credit and taxing power of the U.S. government. As an investor, you can purchase paper bonds at your local bank or credit union, or you can purchase those bonds electronically directly from the U.S. Treasury. When you buy a Series EE savings bond, you pay half the denomination and receive the full face value when the bond matures. That means you pay $25 for a $50 bond and receive the full $50 when the bond matures.
Visit your bank and ask for an account representative. Let the account rep know you are interested in purchasing Series EE savings bonds. Many banks and credit unions sell savings bonds to their customers. Buying savings bonds at the bank is a real convenience, especially for buyers who are not comfortable buying online or for parents and grandparents who want to buy paper bonds for their children and grandchildren. Paper bonds are sold in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000.
Open an account at TreasuryDirect.gov if you prefer to buy electronic Series EE bonds online. Enter your personal information into the sign-up form, including the account number and routing number for the bank account you want to use to fund the account. Linking your bank account to the Treasury Direct account makes it easier to add to your savings bond investment whenever you want.
Choose the denominations you want to use when purchasing the Series EE bonds. You can purchase these bonds electronically in any denomination of $25 or more. You can buy those bonds in increments as small as a penny. For example, you can purchase a bond with a denomination of $25.01.