What Is a US Savings Bond and Why Would I Choose One?
Investors are running scared from higher risk investment choices and looking into more stable and less volatile choices. US Savings Bonds are one options for concerned Americans looking for a good return and little risk. There are two types of US Savings Bonds, the I-Bond and the Series EE Savings Bonds. Bonds began as a way to help finance government projects while allowing Americans to save. While they are not as popular as they once were, they are an excellent way to save, particularly for low and middle income families struggling in a rough economy. They can be redeemed without a significant penalty, can be held for as long as 30 years, and earned interest is tax deferred.
I-Bonds are sold at face value. A $50.00 I-Bond costs $50.00, whether purchased via payroll deduction, your local bank or online from the U.S. Treasury. The earning rate for these savings bonds is a combination of a fixed rate and an inflation rate. These rates are announced by the Treasury in May and November. The fixed rate will remain the same for the life of the bond, while the inflation rate will be recalculated every six months. If redeemed after twelve months but before five years, you will forfeit three months interest. There is no penalty after five years. If you own I-Bonds, you can use the calculator at treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm to allow you to determine the current composite interest rate.
An EE-Bond is probably the type of savings bond most of us remember. Fixed rates are set every six months for Series EE-Bonds. When buying paper EE-bonds, a $50.00 bond may be purchased for $25.00. Bonds purchased electronically are figured somewhat differently and purchased at face value. As with the I-Bonds, the minimum term is one year and bonds will continue to accrue interest at the fixed rate for the full 30 year term.
Obviously, bonds are a low risk, relatively low return investment. There are some distinct advantages. You can purchase bonds online at treasurydirect.gov, via your employer, or at your local bank. You can cash in treasury bonds at any bank or credit union. Earnings are not subject to state or local income taxes and even federal taxes may be waived if the earnings are used for education. Americans can purchase up to $5000 in savings bonds annually, and couples may each purchase them under their own social security numbers. Bonds were once a popular gift for children, and with good reason. This is a low maintenance investment that will take care of itself for years to come.