Definition and Examples of Savings Bond Plans
How Savings Bond Plans Work
Advantages and Disadvantages of Savings Bond Plans
Frequently Asked Questions
Definition and Examples of Savings Bond Plans
A savings bond plan allows you to deposit a portion of your salary into a TreasuryDirect account to automatically and regularly purchase government-backed debt securities (U.S. savings bonds).
The savings bond plan enables you to automatically buy U.S. savings bonds using payroll deposits. To enroll in a savings bond plan, you will need to set up a TreasuryDirect account. You can purchase Series EE bonds or Series I bonds using the savings bond plan. Savings bonds are considered low-risk investments, but this also means you won’t earn much compared to other types of investments.
How Savings Bond Plans Work
A savings bond plan directs money directly from your paycheck into an account used to purchase U.S. government securities (savings bonds) when there is enough money in the account. It works similarly to direct deposit, but instead of sending your money automatically to a bank account, it is sent to a TreasuryDirect account. TreasuryDirect is the site that allows investors to buy U.S. government securities.
You can invest in two types of savings bonds using the savings bond plan: Series EE bonds and Series I bonds. Series EE bonds earn interest for 30 years and are guaranteed by the government to double in value within 20 years. For the first 20 years, the bonds earn a fixed interest rate, which can then be adjusted. Series I bonds offer a fixed interest rate plus a semiannual adjustment for inflation. The treasury guarantees that the interest rate will never fall to zero. Series I bonds may be particularly attractive when inflation rates are high.
Both savings bonds are sold at face value and accrue interest monthly. Interest accumulates semiannually until the bonds reach their maturity date after 30 years or until you cash them in – whichever comes first. You receive the accrued interest when you redeem the bond.
You can cash in savings bonds after 12 months, but if you do so within the first five years, you will forfeit three months of interest. For example, if you cash in savings bonds after 24 months, you will only receive the value of 21 months of interest.
Treasury bonds are also sold by the treasury, but they are not savings bonds. Savings bonds can only be purchased through the government, with a maximum of $10,000 per year. Government bonds are sold at auction by the government but can be sold by a broker or in secondary markets. You can invest up to $10 million in Treasury bonds.
How to Enroll in a Savings Bond Plan
To enroll in a savings bond plan, you need to set up a TreasuryDirect account. Once the account is created, you can set up a payroll savings plan. You will choose the type of savings bond you wish to invest in and the cash amount you would like to purchase.
Then you ask your employer to make periodic transfers from your salary through direct deposit. You will enter “TREASURYDIRECT” as the name of the receiving bank and provide the appropriate account and routing numbers for your TreasuryDirect account.
The money you deposit is used to purchase a non-interest-bearing security called a “Certificate of Indebtedness” (C of I) that will fund your savings bond purchases. Once enough money is accumulated in your C of I to buy savings bonds, the TreasuryDirect system will automatically make the purchase on your behalf.
For example, if you want to buy $25 I Bonds and contribute $12.50 with each paycheck every two weeks, TreasuryDirect will automatically purchase one $25 bond using your C of I after the first two paychecks, then will buy another $25 bond every four weeks thereafter.
You can
Purchase up to $10,000 in the fiscal year from Series I and Series EE bonds, or a total of $20,000 annually.
Advantages and Disadvantages of the Savings Bond Plan
Advantages:
- Automatic saving
- Tax benefits
- Safer than other types of investments
Disadvantages:
- Opportunity risk
- Low returns compared to some other investments
- Penalty for early redemption
Frequently Asked Questions
How do savings bonds work?
How do you cash savings bonds?
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Sources:
TreasuryDirect. “Buying Savings Bonds.”
TreasuryDirect. “Series EE Savings Bonds.”
TreasuryDirect. “I bonds.”
TreasuryDirect. “Comparing Series EE and Series I Savings Bonds.”
TreasuryDirect. “Treasury Bonds.”
Investor.gov. “Savings Bonds.”
IRS.gov. “Using Your Income Tax Refund to Save by Buying U.S. Savings Bonds.”
TreasuryDirect. “Cash EE or I Savings Bonds.”
Source: https://www.thebalancemoney.com/savings-bond-plan-5207161
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