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When you buy a US Treasury Savings Bond, you lend money to the US federal government. In return, you earn interest on your money.
You essentially lend money to the US federal government and earn interest in return
Savings bonds are insured by the US government, making them a safe investment.
For many years, paper version of savings bonds were sold by financial institutions like banks over the counter. But, in 2012, the treasury department ceased this method of sales.
Today, savings bonds are sold primarily in electronic form through the TreasuryDirect website.
The only remaining way to purchase paper savings bonds is with the yearly tax return.
You can use tax form 8888 to request to receive part of your refund in Series I paper savings bonds. That's IF you are owed a tax refund.
Just like their name suggests (double E), series EE bonds double in value after 20 years
Stopping paper bond sales made buying savings bonds as gifts difficult.
Many people look for other ways to give financial gifts.
Greatest Gift is a popular alternative to giving savings bonds as gifts for kids.
Bonds are sold at face value and earn interest on top of their original face value. They can earn interest for up to 30 years or until you cash them in.
For example, a $50 series EE bond will cost $50 when you buy it and will start earning interest on top of that. When you decide to cash is in, you will receive the $50 you invested and any interest that earned over that time.
The minimum purchase is $25. The max you can purchase per person is $10,000 in a calendar year.
Bonds need to be held for at least 1 year before they can be cashed in. They also have a small penalty equal to the interest earned in the last three months if you cash them in within the first five years.
Bonds need to be held for at least 1 year before they can be cashed in
Interest earnings are subject to federal income tax and are not subject to any State taxation.
However, earnings may be exempt from federal income tax. To be exempt, the bonds need to be used to pay for qualified higher education costs.
There are two types of US savings bonds:
Despite their guaranteed doubling in value after 20 years, Series EE bonds often have lower initial interest rates. This makes them a more conservative choice for long-term savings goals.
It's important to note that the doubling effect in the 20th year effectively boosts the overall yield.
These bonds particularly appealing for those with a specific, long-term investment horizon.
However, if you're looking for more immediate or higher returns, it's wise to explore other investment avenues alongside Series EE bonds.
Series I savings bonds stand out for their unique inflation-protection feature, adjusting their returns in line with the inflation rate.
This feature can be particularly advantageous in times of high inflation.
The combination of a fixed rate and a variable inflation-indexed rate makes these bonds a dynamic choice for protecting your investment's purchasing power.
However, investors should be mindful that while they offer inflation protection, the overall return might still be lower compared to more aggressive investment options.
US savings bonds can be redeemed as soon as they turn 12 months old.
If you cash them in before they are five years old, you will lose the last three months of interest.
To find the current value of electronic savings bonds that you own, go to the TreasuryDirect website and log in to your account. To find out the value of a paper bond purchased with your tax return, use the TreasuryDirect’s Savings Bond Calculator.
US savings bonds can be redeemed as soon as they turn 12 months old
You can cash in your electronic bonds through the TreasuryDirect website and receive the redeemed funds directly into your bank account.
Some local banks and financial institutions allow cashing in paper bonds at their local branches. Ask your bank if they cash bonds. Make sure to bring an ID with you.
Alternatively, you can send paper bonds to the Treasury department along with FS Form 1522 and get the funds deposited directly to your bank account.
Electronic bonds may be partially cashed in, meaning you can choose to cash in just a portion of a bond that you own. You'll just need to leave a minimum of $25 in the account.
Cashed in bonds that have earned interest are subject to federal taxes. You will be provided with a 1099-INT form to submit with your yearly tax return when you cash in the bonds.
There are a few benefits to purchasing savings bonds.
The first benefit is the low-risk nature of it as an investment.
Since savings bonds are guaranteed by the US federal government, there is very low risk that they will fall in value.
In fact, they may even be better than cash that loses value due to inflation every day.
Series I bonds track inflation and are supposed to protect owners from inflation.
Series EE’s one time doubling adjustment essentially guarantees an effective interest rate 3.5% per year.
If there is one benefit of purchasing savings bonds, it’s the low-risk nature of it as an investment
Another benefit of savings bonds is that it encourages saving for the long term. This is especially beneficial when looking to invest for kids.
This is why many people buy savings bonds for kids as gifts.
Bonds have a minimum of 12 months before they can be redeemed and have a penalty for cashing in before 5 years.
Specifically, series EE have a bonus one-time doubling adjustment if you keep them for 20 years.
On average, savings bonds have a lower rate of return than other more aggressive investments.
Waiting periods, penalties and bonuses may be encouraging for people to save for the long term on one hand. On the other hand, they also limit people’s options.
Finally, savings bonds are exclusively managed on the outdated Treasury Direct website. You may want to avoid the glitchy website and opt for a different investment, especially if you want to gift money to kids.
As we wrap up our exploration of U.S. Treasury Savings Bonds, let's focus on their practical applications.
Savings bonds might seem like a relic of the past, but they serve several modern financial needs with simplicity and reliability.
Savings bonds are a cornerstone for risk-averse investors.
Whether you're just starting your investment journey or looking to diversify your portfolio, these bonds provide a stable, government-backed option.
Their guaranteed returns make them an appealing choice for those who prefer a more predictable investment path, especially in an uncertain economic climate.
However, if your primary goal is growth, you might consider diversifying with more aggressive options.
Participating in the stock market may provide higher returns, at a higher risk.
Savings bonds are best suited for those who prioritize stability over high growth in their investment portfolio.
Savings bonds can be a part of your emergency fund strategy, especially for the long-term portion of your reserves.
They provide a stable growth platform, though they're not as immediately accessible as cash.
Remember, you can cash them in after a year, but holding them longer avoids any penalties and maximizes interest accumulation.
It's worth considering complementing them with a high-yield savings account.
HYSAs offer more liquidity while still earning interest, ensuring that a portion of your emergency fund is readily available when you need it.
Perhaps one of the most heartwarming uses of savings bonds is as gifts, particularly for children and grandchildren.
Gifting a savings bond to a child not only helps them financially in the future but also introduces them to the concepts of saving and investing from an early age.
It's a thoughtful way to contribute to their education fund, first car, or even their start in life as adults.
Savings bonds as gifts for kids are a thoughtful financial gift.
Banks used to sell paper savings bonds at their branches, but stopped when the IRS ceased the selling paper bonds and moved to primarily selling the electronic version.
The only way to buy a paper bond these days is through your yearly tax return with tax form 8888.
Savings bonds are sold at face value, meaning a $100 savings bond can be purchased for $100.
The bonds earn interest on top of their original face value. They can earn interest for up to 30 years or until you cash them in.
How much a $100 Savings bond is worth depends on the bond’s series and age.
When you cash in a bond, you get the original value plus any interest it earned over the years.
How much a $100 Savings bond is worth depends on the bond’s series and age.
To see the value of an electronic bond you own, log in to your account.
To see the potential value of another bond, check out the savings bonds calculator.
In summary, U.S. Treasury Savings Bonds offer a multifaceted financial tool suitable for a variety of needs.
Bonds maintain their relevance in contemporary financial planning.
Whether for investment, security, or gifting, they remain a steadfast option in a world of complex financial choices.
I hope this guide has provided you with insightful information on how savings bonds can fit into your financial landscape.
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