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Savings bonds are a safe way to invest in Treasury bonds issued by the US government, with Series EE and Series I being the most common types. They offer a low-risk return on investment, with a limit of $5,000 per year and the option to purchase electronic vouchers. The bonds have benefits and responsibilities, including a requirement to hold them for at least five years to avoid interest penalties and the possibility of generating enough interest income to move into a higher tax bracket.
Savings bond is a form of Treasury bond issued by the United States government. There are several types of bonds currently in circulation, with Series EE bonds being the usual type of bond extended to an individual investor. Series I bonds are also available, while another form of savings bond, Series HH bonds, are no longer issued. All types of savings bonds earn a return on investment assuming they are held to maturity.
Bonds issued by the United States government first emerged in the days of World War I. With no means of obtaining financing from other countries, the government turned to the public and offered them the opportunity to purchase what are known as Liberty bonds. As the bonds began to mature after the war, it became necessary to refinance the debt associated with the bonds.
Over time, the savings bond emerged as a very safe way to conservatively build a nest egg for retirement. In general, the Series EE bond is what people think of when buying bonds. These bonds are issued for half face value and will mature for a long period of time. For the best return, it is advisable to hold the bond for the full thirty years of the maturity period. Since May 2005, new Series EE bond issues pay a fixed interest rate, while EE bonds issued before that date accrue interest using a different formula.
Along with the Series E type of bonds, there is also the Series I. These savings bonds are issued at full face value and offer a variable interest rate that is directly related to the current level of inflation. In fact, this rate has two components present. There is a fixed base rate for the life of the bond. The second component is a variable interest rate that is reviewed every six months. While the Treasury Department sets the fixed rate component, the variable rate adjustment is calculated using the Consumer Price Index.
The United States government imposes an annual limit on the purchase of savings notes. As of 2008, that limit is set at $5,000 in US dollars, although it is possible to purchase electronic vouchers and double that figure. A paper savings bond can be purchased at a local bank or credit union. Electronic bonds can be purchased online at a secure site established by the United States Department of the Treasury. The government also provides an online savings bond calculator that people can use to check the current value of their bonds.
There are benefits and responsibilities associated with purchasing a savings bond. This type of investment carries almost no risk, ensuring that the bondholder will be sure to earn a return over time. However, the interest on savings bonds will be extremely small compared to other investment options. Additionally, it is generally necessary to hold the bond for at least a five-year period after purchase to avoid incurring interest penalties.
Although a savings bond will increase in value over the years, the growth is not taxed until the bond is redeemed or until the bond reaches full maturity after thirty years. For people who prefer to pay taxes on income earned later than now, buying a savings bond each year is a good option. However, there is always the possibility that a sufficient number of the bonds will mature or be redeemed in the same calendar year, which could generate enough interest income to move the individual into the next higher tax bracket.
Smart Asset.
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