In short, a savings bond is a loan to the government for up to 30 years. It’s a safe investment, but it doesn’t bring in as much money as some others.
So, what exactly is a savings bond? When you buy a savings bond, it’s like giving the U.S. government a loan.
It is considered a “non-marketable security,” which means it cannot be bought or sold on a secondary market like stocks or bonds.
Instead, savings bonds are sold directly to the public by the Treasury. They typically offer a fixed interest rate over the life of the bond, and can be cashed in for their face value after a certain period of time.
They are considered a low-risk investment option because they are backed by the full faith and credit of the U.S. government.
You can put yourself or someone else, even a minor, down as the savings bond holder (under 18 years of age).
No one but the bond’s owner or beneficiary will be able to cash it.
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There Are 3 Types Of U.S. Savings Bonds
There are three types of savings bonds you can buy in the U.S.
The federal government of the United States gives out I bonds and EE bonds.
Local governments give out municipal savings bonds, which are often called “muni bonds.”
I Savings Bonds
I savings bonds came out for the first time in 1998. Depending on when that was, the interest rate you’ll get on these bonds will be different.
They get a fixed rate of interest plus a variable rate based on the consumer price index for all urban consumers (CPI-U).
About every six months, the rate can change.
Visit TreasuryDirect.gov to learn more about I Savings Bonds.
Read more: Treasury Direct Announces Series I Bonds Rate of 6.89%
EE Savings Bonds
EE savings bonds have a fixed rate of return, which is different from I savings bonds.
If you don’t cash the checks for at least 20 years, you’ll get back twice what you paid for them. There were no surprises there; it was just a sure way to double your money over time.
Since 1980, people have been able to buy Series EE savings bonds.
Rules have changed over time. If you have an EE bond issued before May 2005, you earn either variable bond rates or fixed rates, depending on the exact date the bond was issued.
EE Savings Bonds only have a fixed rate right now, which you’ll know when you buy them.
TreasuryDirect.gov has more information about EE Savings Bonds.
Municipal Bonds
Most municipal bonds, also called “munis,” are issued by local or state governments.
These bonds can be used to pay for specific projects that will help the local community, like building a new school or meeting the regular obligations of the state.
Bondholders don’t have to pay federal income tax on them, but they might have to pay state income tax instead. Whether or not you have to pay depends on where you live and where the bond was issued.
These bonds earn and pay interest at regular times, and you’ll know when they’ll be paid off right away.
Investor.gov is where you can learn more about municipal bonds.
Series HH Savings Bonds (No Longer Available)
You may have heard of series HH bonds, or you may know someone who owns them.
This type of bond is no longer sold, so if you have one, you must have bought it a long time ago. In September 2004, these bonds were no longer being sold.
You can no longer buy series HH bonds. But if you have one, you can still cash it in at your local bank.
TreasuryDirect.gov is a good place to find out more about Series HH Savings Bonds.
Read more: See the best nationwide savings and money market rates
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Pros & Cons
Most Americans feel safe putting their money into savings bonds.
But because they are low-risk, they don’t give you a very high return on your money (ROI).
Even so, they can still be a good way for some people to save money. They could be right for you if you like to play it safe and want to make sure you get your money back.
The money you put into a savings bond is always safe, so you can’t lose the money you put into it in the first place. Still, that amount likely won’t keep up with inflation.
Read more: Best Short-Term Investments of January 2023 – Savings, CDs, Bonds & More
Pros Of Savings Bonds
The positives of savings bonds include:
- Savings bonds are one of the safest things you can invest in. There is no chance of losing the money you put in, and you will always get something back, even if it’s not much. You are basically giving the U.S. government a loan, so it should be safe to say that they have to pay you back.
- Savings bonds can also be put in the name of children under 18 years old. People often give savings bonds to kids for their birthdays, even though it might seem like an unusual gift. Then, they can use this money to go to college or buy anything else they want.
- The interest you earn on savings bonds is not taxed by the state or local government. You only have to pay the federal income tax, which won’t be a problem until you cash in your bond. Also, some taxpayers might be able to get a tax break if they use that income to pay for school.
Cons Of Savings Bonds
The negatives of savings bonds include:
- Savings bonds are a low-risk investment with a low return on investment. They might be a great gift for a child or teen who is just starting to learn about money. But if you are over 30 and making a good salary, you could do better by investing in the stock market or something similar. These investments will be riskier, but you will probably make more money from them.
- You can cash in your savings bonds before they reach their full maturity date. But, it’s usually best to wait because if you sell too soon, you’ll lose some of the return.
- Savings bonds are debt securities that don’t come due for a long time (around 20 to 30 years). That means you won’t be able to get your money for a long time after you put it in.
Here’s How To Buy A Savings Bond
In the past, you could only buy federal bonds through the mail. They were all sold on paper with a serial number.
Now that things have changed, you can buy the most recent EE bonds on the U.S. government website, treasurydirect.gov.
You can still buy paper savings bonds, but you’ll have to choose series I bonds and pay for them with your federal tax refund. To do so, use IRS form 8888.
To sum up, you can only buy series EE bonds online, while you can buy series I bonds either online or as paper bonds. Electronic bonds, unlike paper ones, can be bought in amounts as small as one penny.
Anyone can buy up to $10,000 in electronic bonds per Social Security Number (SSN) and per calendar year. For paper bonds, the most each person can have is $5,000.
Municipal bonds are a bit different. You can buy them from places like banks, brokerage firms, and bond dealers. Sometimes you can even buy them directly from the government.
Read more: Best Savings Accounts With >6.00% Interest – Are They Worth It?
Here’s How To Redeem Your Savings Bond
Most of the time, old savings bonds are cashed in at places like banks or credit unions. If you have a paper bond, this is usually how you can cash it in.
Most of the time, you can buy and cash in municipal bonds at a bank or credit union.
Electronic savings bonds should be redeemed through the same website where they were bought, with your TreasuryDirect account.
After you cash them in, they are automatically put into your bank account within a few days, which is pretty convenient. You can put them in either your checking or savings account.
If you only want to redeem a part of an electronic bond, you need to keep in mind the minimum redemption amounts and minimum remaining balances.
When you cash in a bond, you should get a Form 1099-INT that clearly shows your taxable gain.
If you have a paper bond that you want to cash in, the bank can give it to you right away. By the end of the year, the form for electronic bonds should be sent to you by email.
Read more: Earn a high rate with the cash account from Empower
Who Are Savings Bonds For?
Savings bonds are typically marketed as a safe and low-risk investment option for individuals.
They can be a good choice for people who want a simple and stable investment option, and are not comfortable taking on much risk. They are also a popular option for people who want to save for long-term goals like retirement or a child’s education.
They can also be a good option for people who don’t have a lot of money to invest, since they can be purchased for as little as $25. This makes them accessible to a wide range of people, including those on a tight budget.
Additionally, some people purchase savings bonds as gifts for children or grandchildren, as it is a good way to introduce them to savings and investments, and also because they may be used as collateral for student loans
Overall, savings bonds are a low-risk option for anyone looking for a stable investment that can be held for the long-term, but bear in mind the return of savings bonds are not as high as other investment options such as stocks, therefore, it may not be suitable for those who are looking for higher returns.
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Frequently Asked Questions (FAQs)
Most savings bonds can be bought online for half of their face value. This means that a $1000 savings bond should cost $500, a $500 savings bond should cost $250, and so on.
When you first bought it, a $100 savings bond should have cost you about $50.
It’s important to remember that the value of a $100 bond is not $100 right away because it earns interest.
Most bonds don’t reach their face value (in this case, $100) until 20 years after they were bought.
Keep in mind that if you want to cash in a bond that is less than five years old, you will lose three months of interest.
Also, the Treasury promises that your bond’s face value will be reached within 20 years of the date you bought it.
So, for the Treasury to keep its promise, the $100 bond you bought for $50 must be worth at least $100 in 20 years.
You can easily find out how much your bond is worth on any given day if you want to. First, though, make sure you have the bond’s date of issue, serial number, type (or series), and face value.
When you have this information, a savings bond calculator is the best and easiest way to figure out how much your bond is worth. There are many choices online, but the U.S. Department of the Treasury website is the official one.
Just put in the numbers, and the online calculator will do the rest. As long as the information you put in was correct, the result should be correct.
As a general rule, a $200 savings bond for which you paid $100 (half its face value) should be worth at least $200 after 20 years.
This is because the Treasury guarantees that a bond’s face value will be paid in full after no more than 20 years.
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