U.S. Savings Bonds are debt instruments issued by the U.S. Treasury. When you buy one, you become one of the creditors that holds the United States’ debt, so it is backed by the full faith and credit of the U.S. government. As investments, savings bonds are easy to purchase, and are very safe.
There are two primary series of savings bonds available, Series EE and Series I. Both series are offered as paper bonds, sold through financial institutions or via payroll deduction, and are available as electronic bonds, purchased through www.treasurydirect.gov.
Most of us are familiar with the Series EE paper bonds, which are traditional savings bonds (They replace the Series E Bonds, which are no longer issued). These are available in 8 different denominations, $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. They are purchased for half the face value and accrue interest, and are guaranteed to be worth face value in 20 years
Electronic Series EE bonds can be purchased for any amount over $25, even for $26.19, for example, if you have a specific to-the-penny amount you want to spend. These are purchased at face value and earn a fixed rate of return (for bonds issued after May, 2005).
Series I bonds differ from EE bonds in two respects: First, they cost face price, even when purchased in paper form. Second, the interest yield is calculated differently. Series I bonds earn a fixed rate of return, plus a semiannual inflation rate adjustment.
Which is better? With EE bonds, you know what the bonds will pay, so it’s a stable, predictable yield. With I bonds, you can earn more if inflation is rising, but may earn less in a stable period or one with deflation.
Interest compounds semiannually for 30 years, and current yield rates can be checked on the treasury direct web site. The value of your bonds can be determined at this site as well. A linked site that is helpful is www.savingsbonds.gov.
Tax treatment of savings bonds is also a consideration in determining their value as an investment. The interest is exempt from state and local income tax, although it is subject to federal income tax. There is a provision in the tax code for the use of savings bonds proceeds for educational purposes, so there can be tax benefits for that.
Bond holders often ask, “When can I get my money?” You do not have to wait 20 or 30 years for the bonds to mature. You can cash your bonds in anytime you like – but there is a cost if you cash in too early. If you redeem a Series I or EE bond in the first 5 years, the penalty is three months of interest. If you hold the bond for at least 5 years, there is no penalty. Remember that you will not get face value on a paper EE bond if you cash it in early you will only get your investment plus the interest earned.
Other rules? Well, minors may own savings bonds, as opposed to many securities that may only be held in the name of an adult. There is also a limit: You can purchase up to $30,000 per year in electronic bonds per Social Security number, and another $30,000 in paper bonds.
You can make more money elsewhere, so why invest in savings bonds? For some people, bonds are a safe and stable way to put some money back for retirement. For others, the tax treatment makes them a good way to save for their children’s education. Still others purchase the paper bonds for gifts. They celebrate birthdays, graduations, bar mitzvahs, and other special events with the gift of a savings bond. It’s a gift of money that has to be put back for the future.
Yet another consideration is the way bonds are purchased. Unlike purchases of stocks or mutual funds, there are no brokerage fees involved in purchasing savings bonds. There is also no time lag between placing your order and waiting for a middle man to fill it. You walk into the bank, buy the bond, and walk out with it (or go online and order it yourself!).
Savings bonds are not the highest paying securities available by any means, but they are one of the safest. They can have a place in your portfolio, but you need to determine what that place is, and why you would wa