Are Savings Bonds A Good Deal or Not?
People often wonder how they can invest their personal fund to grow it at a comfortable rate. One of the simplest and most hassle-free ways to save and build funds is with savings bonds. This is because they have “relatively low levels of risk tolerance.”
What most people wish to know, though, is ‘are they a good deal?’ First, we have to go through what a savings bond is.
What is a Savings Bond?
A U.S. savings bond is “issued by the U.S. Department of the Treasury and is a debt security.” These bonds are issued as a way for the government to cover their borrowing needs. Purchasing a savings bond is essentially lending your money to the federal government. (Isn’t that something? The government owing you?)
When you decided to redeem your bonds, you receive plus interest what the bond is worth, with interest.
The Different Types of Savings Bonds
The definition may be simple, but there are actually two types of savings bonds. They are known as Series EE and Series I. There was a third, Series HH, that though no longer issued can be redeemed if someone has any.
Series EE U.S. Savings Bonds
Also nicknamed ‘patriot bonds,’ these are purchased at face value. To be clear, if an EE bond carries a tag of $75, you will pay that exact amount for the bond.
Any bonds issued from May 2005 and on have a 30-year fixed interest rate. EE bonds purchased before 2005 have what is called a “variable rate of interest.” The variable is adjusted every few months.
When you accrue interest, it adds to the face value of the EE bond. Redeeming your bond will earn you back what was paid initially, plus any interest earned in the time up to redemption.
Series I U.S. Savings Bonds
This particular bond is protected against negative inflation, hence the ‘I’ in the name. Series I have a fixed interest rate. You can also gain additional earning based on different inflation rates. Much like the Series EE bond, Series I gain interest for up to three decades.
While it may be enticing to purchase these bonds, you can’t buy more than $10,000 worth of I bonds in one calendar year.
Series HH U.S. Savings Bonds
These bonds were discontinued in 2004, making them impossible to purchase now. Thankfully, it is still possible to redeem them.
HH bonds that have yet to mature have an annual interest rate of 1.5%. This interest is paid every six months in the form of a direct deposit into your bank account. These bonds mature for two decades, about 10 years shorter than Series I or Series EE.
The Benefits of Savings Bonds
It is entirely possible to give out bonds as gifts, but considering the possible gains, you might want a few for yourself.
Here are a few things that savings bonds can help with:
- Diversification of risk in your portfolio
- Knowledge that your investment is safe
- Savings that can grow on a tax-deferred basis
- Interest that’s not subject to state and local taxes
- Other potential tax benefits if the interest you earn is used to pay for qualified educational expenses
- No commission on your investment
Bonds are a great supplemental source of income for retirement savings. Series EE and I bonds give you ample opportunity to earn up to $10,000 per year from each.
How Savings Bonds Work
A bond can be purchased from the U.S. Treasury Department’s TreasuryDirect.gov. Bonds are purchased at face value, and you receive a promise that interest is paid up until the bond’s full maturity.
Redeeming your bonds five years before maturity will also lose you three months’ worth of interest. Give your children the nice gift of a bond that they can grow up and mature with. The bond could very well pay for their college tuition.
How to Cash in Savings Bonds
Back in January of this year, the U.S. government reported that nearly $23 billion in bonds was waiting to be redeemed. Redeem your matured bonds if you haven’t already.
Electronic EE and I bonds can be redeemed through your Treasury Direct account, provided you follow the instructions when prompted. After redemption, the funds can be directly deposited into a checking or savings account in just a few days.
Paper EE and I bonds, surprisingly enough, can be redeemed at most credit unions or banks. Or, if you prefer a paper trail as added insurance to Treasury Retail Securities Services at P.O. box 214, Minneapolis, MN 55480-0214.