US Savings Bonds

US savings bonds are often thought of as a poor man’s route to savings. Many aggressive investors and traders scoff at the idea of buying US savings bonds every payday and holding them for as long as thirty years. However, there are a number of advantages to buying and holding US savings bonds. As with all investment opportunities a little fundamental analysis of the subject is useful. So before comparing US savings bonds to dividend stocks, US Treasuries, or municipal bonds let us look at a few specifics about US savings bonds.

US Savings Bonds

These bonds are available in Series EE and Series I. Electronic series EE bonds are purchased via a Treasury Direct account for face value and paper series EE bonds are purchased at their face value. One earns a fixed rate of interest for the thirty year term of the bond. The treasury guarantees that the bonds will double in face value in twenty years.

  • Series I bonds sell at face value at interest rates guaranteed to exceed that of inflation.
  • These bonds are not tradable.
  • The maturity periods can vary. For example, if you buy a bond with a value of $50 for $25, you’ll have to wait at least 17 years to get back your investment from the government.
  • US savings bonds are exempt from state and local taxes.
  • Federal tax is deferred until the bond is cashed in.
  • Interest may be tax exempt if you can document that interest was used to pay qualified higher education expenses and provided that your income falls within federal guidelines for this benefit.
  • As with many long term investments you will commonly cash in US savings bonds when you are retired and when your tax rate is low.
  • US savings bonds pay interest twice a year and are redeemed at par value at maturity.
  • Savings Bonds come in eight values: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000.

Why Purchase US Savings Bonds?

There are certainly lots of investments that can make a lot more money over the years than US savings bonds. And there are lots of investments that can disappear in a puff of smoke during an economic downturn. US savings bonds are like money in the bank. A good rule of thumb for investing is to first pay off credit card debt, invest in your home, and put six months of savings away for emergencies. Think of US savings bonds in this context.

US Savings Bonds versus Municipal Bonds

Like municipal bonds, US savings bonds are free of state and local taxes. Unlike municipal bonds US savings bonds are less likely to default than when cities like Detroit declare bankruptcy.

US Savings Bonds versus Dividend Stocks

Dividend stocks are a common way to balance the risk in an aggressive stock portfolio. However, even large cap stocks call fall in price or fall out of favor. When markets are falling US savings bonds still maintain their value and pay interest.

Buying US Savings Bonds

Bonds are purchased with a Treasury Direct account. For such an account you need a social security number, a driver’s license, a checking or savings account, and an email address. According to the US Treasury site:

  • Minimum Purchase: $25
  • Maximum Purchase: $30,000 per person per year
  • Interest: 90% of 6-month average of 5-year Treasury security yields, added monthly and paid when the bond is cashed
  • Minimum Term Of Ownership: 12 months
  • Early Redemption Penalty: Forfeit three most recent months’ interest if cashed before 5 years

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