Are Savings Bonds Good Investments?

Are Savings Bonds Good Investments?

Savings bonds were once thought to be an intelligent way to put money aside for college or other long-term objectives. Many individuals saw them as a safe bet. The money is secure, and if you buy EE savings bonds, you may anticipate your money to double in value by the time they mature. If they’re utilized for education, they’re also exempt from state and local taxes, as well as federal income taxes.

This appears to be a sound investment approach at first glance. However, are savings bonds good investments? Things aren’t always so black and white. Learn whether US savings bonds are a good investment or if your money would be better spent elsewhere as a veteran.

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What Is a Savings Bond?

Individuals can easily lend money to the government and obtain a return on their investment by purchasing savings bonds. The bonds are bought and sold at face value. So, if you wish to invest $50, you buy a $50 bond, and the interest on that amount will begin to accrue. You will compound your winnings as interest accumulates in the account, so your interest earns interest.

When you buy a savings bond in the United States, you’re essentially lending money to the government. This is because the United States Treasury issues bonds, with the federal government guaranteeing that you will receive your money back.

These bonds are sold at a discount with zero-coupon and an implied fixed interest rate for a set length of time.

Types of Savings Bonds

Like many other assets, bonds aim to balance risk and profit. Bonds with lower risk typically pay lower interest rates, while riskier bonds pay higher rates in exchange for the investor giving up some safety. There are many options for bonds.

Series EE US Savings Bonds

A fixed-rate series EE bond earns interest and a guaranteed double value return if held for 20 years. As a result, regardless of the interest rate, the bond receives a one-time adjustment at the 20-year milestone to ensure its value doubles. Series EE bonds purchased before May 2005 have a variable or fixed rate depending on the issue date.

Series I US Savings Bonds

A series I bond has a rate that is made up of two parts: a fixed rate and a twice-yearly inflation-adjusted rate. The notion is that your money will be safe against inflation, which is defined as an increase in the general cost of goods and services (so you need more U.S. dollars to pay for the same items over time).

T Bonds

Treasury bonds (sometimes known as T-bonds) are federal debt instruments issued by the United States government with maturities of more than 20 years. These bonds pay periodic interest until they mature, at which point the owner receives a principal payment plus a principal amount equal to the principal.

Upon maturity, T-bonds earn periodic interest and a nominal amount equal to the principal.

Bonds issued by the Treasury are part of a larger category of US sovereign debt, which is considered risk-free as they are backed by the government’s ability to tax its citizens.

Municipal Bonds

State, city, and county governments and other non-federal government bodies issue municipal bonds, commonly known as munis. Municipal bonds finance municipal projects such as school construction and highway construction, just like corporate bonds.

Bondholders may not be required to pay federal taxes on interest, resulting in the issuer offering a lower interest rate. In addition, local and state taxes may not apply to you if you live in a state or city that issues municipal bonds.

Short-term municipal bonds mature in one to three years, and long-term bonds might take up to ten years to maturity.

Corporate Bonds

A corporate bond is a loan that a firm issues to raise funds. The idea behind a corporate bond is that investors lend money to a business in exchange for interest payments. However, the bonds can also be traded on the secondary market.

Unlike buying stock in a firm, buying a corporate bond does not give you company ownership. Instead, the corporation pays the investor a fixed interest rate over a certain period of time and then repays the principal at the bond’s maturity date.

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Are Savings Bonds Good Investments? The Benefits

The most significant benefit of saving bonds is that you can rest assured that your money is secure. However, there are some additional benefits:

  • Investments with a low minimum. Unlike some other cash investments, saving bonds can be purchased with as little as $25.
  • Tax advantages. Interest on savings bonds is not subject to state and local taxes. Furthermore, until a bond is paid or matured, you don’t have to pay federal taxes on the interest you earn. When you use the bond proceeds to pay for education, the interest you earn is tax-free.
  • Inflation protection. In a time of solid inflation, Series I bonds can be an excellent way to protect your money’s purchasing value.
  • Neither fees nor expenses are involved. Unlike many other standard methods of long-term saving, there are no ongoing expenses associated with owning saving bonds.
Related:How Military Can Benefit From a Roth IRA

Disadvantages of a Savings Bond

Savings bonds in the United States are not liquid; they must be held for a year before being sold. You lose three months’ worth of interest if you don’t keep them for five years.
You can only acquire $10,000 worth of savings bonds in a calendar year.
Savings bonds typically yield low yields, so you’re unlikely to make a lot of money from them.

How to Purchase a Savings Bond

Savings bonds are no longer sold in banks, and therefore you’ll have to purchase them directly from the US Treasury. If you want to offer paper Series I bonds as gifts, you can buy them when you file your IRS tax return; otherwise, you can buy Series I and Series EE bonds on the U.S. TreasuryDirect website. So to purchase US savings bonds, you have a couple of options.

Electronic Saving Bonds

You can electronically buy Series EE or Series I US savings bonds by creating an account on TreasuryDirect’s website. Besides providing your Social Security number and US address, you’ll need your routing number, account number, and email address.
Series EE and I electronic bonds require a minimum investment of $25. Paper bonds in Series I need a minimum investment of $50.

Standard Paper Savings Bonds

Since Jan 1, 2012, savings bonds have been no longer available to buy over-the-counter at financial institutions. However, there are still options to purchase paper bonds through other avenues.

Tax Refund Bonds

The Internal Revenue Service has a solution for investing in paper bonds. You can choose to receive a paper Series I savings bond as part of or all of your refunds upon filing your income tax return. To do so, submit Form 8888 together with your tax return. You can purchase bonds in $50 increments up to $5,000.

US Savings Bonds – Series EE and Series 1

Series EE fixed-rate and Series I inflation-indexed bonds can be purchased for $25 to $5,000 per year. The interest rates on Series I bonds are increased to account for inflation, which is the fundamental difference between the two varieties. You can acquire US savings bonds if you are at least 18 years old, a citizen of the United States, and have a valid Social Security number. Saving bonds are only available to minors as gifts or with the assistance of their parents. Before you cash in Series EE or Series I bonds, you must wait at least 12 months.

How to Redeem a Savings Bond

If you want to redeem a paper E/EE or I bond, you’ll need a few items. You’ll also need identity confirmation, such as a driver’s license from the United States. You’ll also need an FS Form 1522 that hasn’t been signed. They’ll see you sign the document and then certify your signature if you go to your local bank or credit union.

The unsigned bonds, along with the signed FS Form 1522 and, if you’re the bond’s beneficiary, accompanying legal evidence or other papers to indicate you’re entitled to cash the bond, should be sent to the US Department of Treasury at:

Treasury Retail Securities Services,
PO Box 214
Minneapolis, MN 55480-0214

A paper bond must be fully redeemed when it is cashed.

TreasuryDirect is the place to go if you need to cash an electronic bond. You’ll be able to cash up to $25 in one-cent increments. When you cash your bonds online, the money is usually transferred to your bank or savings account within two business days.

Are Savings Bonds Good Investments: Which Is Right for Veterans?

It’s totally up to you whether something is worth investing in, but savings bonds are a reasonably secure pick in terms of investments. They can help you keep some of your money safe from inflation while supplementing your retirement income. However, like any other investment, savings bonds have their own set of disadvantages.

The main disadvantage of savings bonds is that the return on investment is minimal. Bonds don’t provide the same returns as riskier investments like the stock market, despite being far safer in terms of the potential loss. As a result, you shouldn’t rely just on savings bonds for retirement savings.

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