What is a U.S. Savings Bond?
A U.S. Savings Bond is a debt security issued by the by the U.S. Department of the Treasury to assist the U.S. Government with its borrowing needs. U.S. Savings Bonds are viewed by many as one of the safest investments because they are backed by the credit and full faith of the U.S. Government. Simply put, a U.S. Savings Bond is a personal loan from you to the U.S. Government.
U.S. Savings Bond General Information
U.S. Savings Bonds accrue interest for a maximum of 30 years. They are sold in eight different denominations $25, $50, $75, $100, $200, $500, $1,000, and $5,000. After purchasing a U.S. Savings bond you must wait 12 months before cashing the bond in. When you cash in a bond, the person redeeming the bond will receive the principal plus the accrued interest. If the bond is cashed before 5 years you lose the last 3 months' interest.
Tax Benefits of U.S. Savings Bond
The interest from U.S. Savings Bonds are tax deferred. This means you only pay taxes when the bond is cashed or after the bond stops earning interest. The interest of the bond is taxable by the Federal Government, but not by State and local governments. Tax benefits may apply to the earned bond interest if it is used for higher education.
Purchasing U.S. Savings Bonds and Bond Types
To purchase a U.S. Savings Bond you must have a Treasury Direct account. You can click here to get started. Opening an account requires a checking or savings account, an email address, and a social security number.
There are two types of Savings Bongs, EE-Bonds and I-Bonds.
EE-Bonds
EE-Bonds earn interest for up to 30 years. EE-Bonds purchased from November 1, 2017 to April 30, 2018 have an interest rate of 0.10%, this is a fixed rate. EE-Bonds are purchased and issued electronically, the Treasury no longer issues paper EE-Bonds. When purchasing an EE-Bond the purchaser pays the face value of the bond. For example a $25 EE-Bond cost $25. EE-Bonds come in any amount to the penny. A purchaser could buy a bond for $25.23 for example. The minimum purchase for EE-Bonds is $25 and the maximum is $10,000 per year per social security number.
I-Bonds
I-Bonds earn a combined rate of interest, a fixed rate of return known upon purchase and an inflation rate. I-Bonds currently offer a 2.58% fixed interest rate through April 30, 2018. The inflation rate of an I-Bond can and usually does change two times a year. The interest of an I-Bond is added to the bond monthly and paid once the bond is cashed in. I-Bonds are also sold to the penny. I-Bonds can be purchased electronically via Treasury Direct or paper I-Bonds may be purchased with your IRS tax refund. The minimum purchase of an I-Bond is $25 for an electronic purchase and $50 for a paper purchase with a tax refund; the I-Bond maximum is $10,000 per social security number per year.
Bond Summary
U.S. Savings Bonds are seen as the safest investment a person can make because the debt is backed by the full faith and credit of the U.S. Government. U.S. Savings Bonds are seen as low risk saving instruments, that are good for people looking to supplement retirement income or pay for higher education in the future. Interest on U.S. Savings Bonds is earned monthly and compounded semiannually for up to 30 years. The minimum holding period for a U.S. Savings Bond is 12 months, and after 12 months the bond can be cashed in. Any bond redeemed within five years of the purchase is subject to a 3 months penalty (if redeemed after 18 months, the redeemer will only receive 15 months of interest). The interest received from a U.S. Savings Bond is subject to Federal tax but not state or local taxes. I hope we were able to shed a little light on what U.S. Savings Bonds are and how they work.
If you would like to learn more about EE-Bonds and I-Bonds or purchase a U.S. Savings Bond click here.
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