Understanding Savings Bonds
You’re no dummy. You know things. But few people fully understand US savings bonds. Our grandparents bought us saving bonds when we were three years old. What do savings bonds refer to, and what actions can a person take with them?
US saving 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 saving bonds are of interest to you.
Learn more about savings bonds:
1. US saving 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. Saving bond is 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.
2. Bonds used to be paper-based, but are now electronic. They discontinued paper savings bonds in 2012. Electronic savings bonds are available for purchase online. You must have a Treasury Direct account to purchase savings bonds. https://www.treasurydirect.gov/RS/UN-AccountCreate.do
• You can purchase I, Bonds, one class of saving bond, in a paper format using your tax refund. Bonds can also be purchased in electronic format.
3. There are two types of savings bonds. Both bonds accrue interest which is paid when the bonds are redeemed. They compound the interest 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.
4. There’s a limit to how much you can purchase. You can’t purchase more than $10,000 total of either type of electronic bond 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.
• You can purchase electronic bonds in any amount of $25 or more. You can purchase an electronic bond for $147.43 if you like.
5. The bond can be redeemed after 12 months. While interest is earned monthly, it is only compounded twice per year. Bonds can’t be held for more than 30 years.
6. 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 wouldn’t be concerned with this minimal penalty.
7. You still have to pay taxes on the interest. It doesn’t seem fair to let the government borrow your money and then be charged taxes, but it’s true. The good news is that you only owe federal taxes. State-level taxes don’t apply.
Are savings bonds a good investment? They are certainly a safe investment. The US government is a reliable debtor. You can be certain you’ll receive your money. That low level of risk means that you’re 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.