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How to Invest in United States Savings Bonds

By Edited Nov 13, 2013 1 4

Savings Bonds

So you want to learn how to invest in United States Savings Bonds?  First, a little background information on  savings bonds in the US and the basic premise of how they work.

Savings bonds were first introduced in the US in 1935 when FDR signed into legislation a bill that allowed their creation.  They saw a huge increase in popularity during the second world war and from then on became a standard security for most investment portfolios.

When you purchase a savings bond from the US treasury, you are, in effect, loaning the government of the United States your money.  The interest that the government pays you can be viewed as “rent” that they are paying for the use of your capital.  The main reason that people purchase these bonds is that US government backed securities have historically been among the safest places to park your money in the world. 

There are various types of these US government backed securities.  In this article we will be discussing US Savings Bonds.  Other securities such as TIPs, T-Bills, and Treasury notes are for more sophisticated investors and are usually purchased on large scales by corporations and national governments (although most can be purchased by individual investors).

There are two types of US Savings Bonds:  The I Savings bond and the Series EE savings bond.

The I savings bond has a varied rate of return that is based primarily on the current rate of inflation (semi-annual) and current prevailing interest rates.  The benefit of buying this type of savings bond is that your purchasing power is preserved and that the effects of inflation are mitigated. 

The I savings bonds can be purchased in two ways: Your income tax return (all or a portion) can be sent to you in paper bonds and you can purchase up to $5,000 per year in this method.  The other method is to create an account at http://www.treasurydirect.gov/ via their treasury direct accounts.  You may purchase up to $10,000 per year using this method.  The minimum value for the paper bonds is $50 and the minimum value for the electronic bonds is $25.

Your I Savings Bonds will earn interest for you for up to 30 years.  You may sell them at any point, however after you have held them at least one year.  If you do decide to cash them in before they mature in 3 decades, you’ll pay 3 months interest in penalties, unless you do it after having held your bond for over 5 years.  Any interest earned on your original purchase will be paid at the time of cashing.  Your interest is taxable by the federal government (unless being used for educational purchases), but it is not taxable by state or local governments.

The Series EE Bonds are similar to the I Savings Bonds in most ways.  The difference is how interest is accrued on a Series EE Bond.  When you purchase a Series EE bond, you  are locking in the current interest rate for 30 years.  This can make them especially attractive when interest rates are at historic highs, but very unattractive when interest rates are at historic lows because they will expose you to any inflation in the future. 

Also, unlike I Savings Bonds, Series EE Bonds can only be purchased through a treasury direct account and only exist in electronic form.  The minimum purchase is $25.  Otherwise, they are like, in nearly every other respect, I Savings bonds:

Your Series EE Bonds will earn interest for you for up to 30 years and you can sell them at any point after you have held them at least one year.  If you do decide to cash them in before they mature in 3 decades, you’ll pay 3 months interest in penalties, unless you do it after having held your bond for over 5 years.  Any interest earned on your original purchase will be paid at the time of cashing.  Your interest is taxable by the federal government (unless being used for educational purchases), but it is not taxable by state or local governments.

Savings bonds provide a valuable role in many diversified portfolios because they provide a secure place to park your savings that is relatively unaffected by swings in the stock market or real estate marked  and are backed by the full faith and security of the United States Government.  On a side note: if you think you may have savings bonds that are unaccounted for or have never been cashed, you can check the treasury’s database to find out if you have any recoverable interest, bonds or cash by following the link below:

http://www.treasurydirect.gov/indiv/tools/tools_treasuryhunt.htm

Best of luck, and happy investing!

 

 

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Comments

Feb 15, 2013 12:35pm
moronkee
Thanks for the information. I checked the links you provided.
Please,is the treasurydirect website approved because there are many scam artists on the internet.
Once again thanks for sharing.
Feb 17, 2013 10:51am
IndianSummerLife
The treasury direct website is a United States Government website. You should be okay.

Thanks for reading,
IndianSummer
Feb 15, 2013 12:35pm
moronkee
Thanks for the information. I checked the links you provided.
Please,is the treasurydirect website approved because there are many scam artists on the internet.
Once again thanks for sharing.
Feb 15, 2013 11:45pm
aguy
I always liked the old paper bonds. At least you had something you could see besides a line on a statement.
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