U.S. Savings Bonds are a safe place to save money if you’re tired of the interest rate you’re getting on your savings account at the bank. Bonds are equally a safe place to keep a portion of your savings, but they have their advantages and disadvantages.
Savings Bonds vs. Savings Accounts
The security of your money in most bank accounts comes from insurance provided by the Federal Deposit Insurance Corporation (FDIC). This insures up to $250,000 per depositor as of 2021. While your money may be safe in a savings account, the interest rate is likely very low.
Your money is also safe in U.S. Savings Bonds, but not through FDIC insurance. Savings Bonds are fully backed by the U.S. government. Individuals seeking to secure their capital can rest assured that as long as the U.S. government exists, it is obligated to repay the principal and interest on Savings Bonds.
Tax Benefits
If you’re concerned about taxes, Savings Bonds can provide some relief. Savings Bonds are issued by the federal government, so they are exempt from local and state taxes. Additionally, the interest earned on the bonds can be deferred until the bond is redeemed, unlike regular savings accounts and certificates of deposit, where taxes are applied to the entire interest earned as ordinary income each year.
Series EE Bonds
Series EE Bonds are the standard savings bonds. They replace the previous Series E bonds that the U.S. Department of the Treasury no longer issues. Series EE Bonds purchased on or after May 1, 2005, earn a fixed interest rate, allowing you to easily calculate the value of your bonds at any given time.
You will lose three months’ worth of the last interest earned if you redeem a Series EE Bond at any time during the first five years, but redeeming an EE Bond at any time after five years will not incur a penalty. You must also wait at least one year before redeeming an EE Bond.
Buying Series EE Bonds from TreasuryDirect
You can buy Series EE Bonds directly from TreasuryDirect online. Electronic bonds are sold at their face value, meaning you will pay $25 for a bond worth $25. The bond is worth its full value when redeemed, plus any accrued interest.
These bonds can be purchased in any amount starting from $25 or more. The maximum purchase in a single fiscal year is $10,000 as of 2021.
Paper EE Bonds
Paper EE Bonds are no longer sold. Unlike the electronic version, paper EE Bonds were sold at half of their face value. For example, you would pay $25 for a bond worth $50. The bond then increases in value over time as it earns interest. The bond does not reach its face value until it matures, but the Treasury guarantees that the bond will be worth twice its face value within 20 years if purchased on or after June 1, 2003.
Advantages and Disadvantages of TreasuryDirect
If you’re like many people, you may find it difficult to keep track of paper slips, even important papers, over the years. One advantage of buying through TreasuryDirect is that you won’t need to. TreasuryDirect “stores” your bonds on your behalf. You just log in online and access them whenever you want.
The site is very secure as well, so no one else should be able to access your bonds without your consent, knowledge, and cooperation. You will need a password and a security code to log in.
Finally,
You do not need to go to the bank when it’s time to redeem your bond. TreasuryDirect sends the money directly to your bank account. You should receive the money within two to three days. How easy is that?
However, if you rely on quarterly or annual statements to help organize your finances, you will not receive paper account statements from TreasuryDirect. However, the system will allow you to print your account information and ensure that you have all the necessary tax documents.
Series I Bonds
Series I bonds are similar to Series EE bonds, but there is a distinctive difference in the amount of interest they pay.
Series I bonds have an interest rate that is adjusted based on the inflation rate. This means that your I bond is designed to keep up with or exceed inflation. The actual interest rate consists of a fixed rate that remains for the life of the bond plus the semiannual inflation rate above that. The inflation rate is determined once in May and again in November.
You purchase Series I bonds electronically just like Series EE bonds. The same restrictions apply. You can buy up to $10,000 in electronic Series I bonds in a single year. Unlike Series EE bonds, you can also purchase paper Series I bonds, but only as part of your federal income tax refund, limited to $5,000 per year. All Series I bonds are sold at face value. You will also lose the last three months of interest if you redeem an I bond within the first five years. You can also set up a savings bond plan.
What interest rate do savings bonds pay?
Interest rates on bonds change over time with fluctuations in other major economic interest rates. EE bonds issued between November 2015 and November 2020 earn a fixed annual rate of 0.10%. In comparison, I bonds issued from November 2020 to April 2021 will earn a composite rate of 1.68%.
Bonds for Higher Education
Using savings bonds to fund higher education has become less attractive with the emergence of Section 529 college savings plans, but they still have some advantages. Bondholders can redeem EE and I bonds issued after 1989 without federal income tax on the interest if the funds are used to cover qualified higher education expenses.
You must be at least 24 years old on the first day of the month in which you purchased the bond to be eligible. The bonds must be registered in your name. You can register your child as a beneficiary but not as a co-owner if the bond is designated for your child.
The IRS also imposes income restrictions that affect when this tax exclusion can be claimed. Refer to IRS Form 8815 for current income limits.
When are savings bonds suitable investments?
U.S. savings bonds are certainly a safe way to save money, but make sure you are putting money into bonds for the right reasons. Keep in mind that interest rates may be higher than traditional savings accounts, but there may be some liquidity concerns. If there’s a chance you may need to access the money within a year, this could be an issue.
Savings bonds should not make up a large portion of long-term savings. The interest earned is very low compared to long-term investments like stocks held in your retirement accounts. Historically, stocks return about 10% per year over time, so investing solely in savings bonds is unlikely to yield the best results.
You should
You should consider savings bonds for financial goals ranging from five to ten years. You can redeem the bonds without penalty after five years, but you might be able to see better returns with other investments if you plan to hold the bonds for more than ten years.
Source: https://www.thebalancemoney.com/u-s-savings-bonds-the-safe-place-to-save-money-1289899
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