How Do Savings Bonds Work?
Though they can be a useful addition to your financial portfolio, how savings bonds work is a mystery to many people. Savings bonds are a type of low-risk investment that are a great choice for those who are new to investing, those who have a low tolerance for risk, and those who are nearing retirement and want to convert higher-risk securities into lower-risk savings. Savings bonds are issued by the United States Treasury Department and are regulated by the same. Due to the nature of savings bonds as a government-issued security, they enjoy a better reputation than most other types of bonds and because they are fully guaranteed by the federal government they are regarded as essentially risk-free. Learn more about how savings bonds work and decide whether this type of bond will make a good addition to your investment portfolio.
What is a Savings Bond?
Savings bonds first appeared in 1935 during the Great Depression as a response by the government to the reduced ability of Americans to invest after the great market crash of 1929. A savings bond, typically sold in $25 increments, allows an investor to make a small, secure investment in a security backed by the federal government's ability to levy taxes and print money. To ensure they would remain low-risk, the federal government decided to sell savings bonds at fixed interest rates with pre-announced maturity values so that investors would know their rate of return as soon as the investment was made. Savings bonds have since become a very popular gift purchase and are also frequently used to help youth and young adults save money for college.
How Do Savings Bonds Work?
Like other government bonds, savings bonds are exempt from state and local taxes, and federal taxes are generally only due when the bonds mature or are redeemed. Another feature of savings bonds is that they can be replaced if they are lost or stolen. Savings bonds come in three varieties: Series EE, Series HH, and Series I. The most popular, by far, are the Series EE bonds, which can be purchased in amounts from $25 to $10,000, and must be held for a minimum of 12 months before the investor is eligible to redeem them without penalty. An investor buys an EE bond at half its face value and, upon maturity, receives the full face value of the bond. Series I bonds are purchased at face value and include a feature that protects the investor from inflation but they also incur a stiffer penalty: redeem an I bond within the first five years and you’ll be forced to forfeit three months’ worth of interest. HH savings bonds are no longer being issued by the government.
How do you Purchase a Savings Bond?
Banks and credit unions typically sell savings bonds but remember to bring a valid driver’s license or photo identification card. Investors can also purchase directly from the U.S. Treasury at treasurydirect.gov, by setting up an account at the Web site.
