For those new to the world of investing, or just use to investing in stocks with investing apps or advisors, a savings bond is one of the safest investment options out there. Essentially, a savings bond is money that is loaned to the U.S. government for a specific term. Once that term has expired the government guarantees returns of a specific amount. Savings bonds continue to be the safest option for investors with a high level of risk aversion, but they typically maintain low-interest rates and only reach their highest profitability when they are allowed to reach maturity.
Unlike other investments, savings bonds come with next to no financial hazards, and they provide people with a worry-free method of saving for the future. The catch is that savings bonds can only be redeemed after a set period; the very earliest is after a 12 month period which comes with a small penalty. To see a savings bond through to its full term is 30 years.
While other forms of investments carry a variable and relatively unpredictable rate of return, a savings bond is guaranteed for a set rate year after year. The downside to this guaranteed return is that the rate is relatively quite low. It is only when the bond is allowed to mature that it becomes more financially beneficial to the holder.
Types of Savings Bonds
Over the history of U.S. savings bonds the government has created and decommissioned many variations. While there is endless information available online about investing in these bonds, much of the information is muddled and outdated. For the most up to date information always consult with the Treasury Department website directly.
The U.S. Government currently offers only two different types of bonds, Series EE and Series I. There are also valid Series HH bonds in circulation, but the last date of sale was 2004. Each bond type has particular differences that should be considered before taking the plunge.
Under most circumstances the maximum number of bonds which can be purchased per person, per year, is $10,000. Bonds are issued in any amount starting from $25 and up to $10,000. At the time of purchase the fixed percentage rate is set by the Treasury Department and will hold until the bond is sold or expired.
This series of bonds used to be sold at 50 percent of face value, which meant that a $100 bond could be purchased for 50 dollars. However, the government recently changed this policy and now Series EE bonds can only be bought at face value. In our example, a $100 bond is now purchased for $100. This has substantially changed the long-term benefit of savings bonds as their value no longer doubles as it reaches maturity.
The Series EE bond is subject to a fixed interest rate which is set at the time of purchase and matures in 30 years (it used to be only 20 years). The current rate is typically set at 0.1 percent, which is notably a meager growth rate for an investment.
Unlike the Series EE bond, the Series I has a fixed and variable rate component. The variable portion is calculated based on national inflation and revised every six months. Because it is based on inflation, and inflation can dip into the negative digits, the Series I has less guarantee for returns year over year. Series I is only beneficial if inflation is expected to be high over the coming decades, something which can be extremely difficult to predict.
When and How to Redeem Savings Bonds
There may come a time, either during the lifespan of the bond or at the time of expiry, that the investor may wish to cash it in. Bonds have become much easier to manage in the electronic age of the Treasury Department, although paper bonds still exist, and specific instructions apply. All available methods for redemption are explained below.
Electronic Bonds: In 2012 the Treasury Department did away with paper bonds altogether and developed an all-electronic system. This makes it easy to cash in electronic savings bonds through the secure online TreasuryDirectsystem.
Paper Bonds: These days it is much more common to hold an electronic savings bond, but the paper copies still exist and can be cashed in at some financial institutions. They can also be sent via snail mail to the Treasury Department for redemption.
For those redeeming online through TreasuryDirect, once available, the funds will be directly deposited into your bank account. For those redeeming through a local bank, you will likely need a form of ID and some banks will only cash in savings bonds for their own clientele.
Those redeeming their bonds through the local post office must include the original paper bond, their social security number, and information (or a blank check) for where they want the money to be directly deposited.
Series HH: As the Series HH is no longer being sold it can only be cashed directly with the Treasury Department either online or via snail mail. It cannot be redeemed at any banks or other financial institutions. More information is available here.
Other Important Considerations for Savings Bonds
- Both Series I and EE can be cashed starting 12 months after purchase, however later is always better
- Both Series I and EE have a penalty of three months interest if they are redeemed less than five years after purchase
- Bonds become increasingly beneficial the longer they are held, as they will continue to earn interest year after year
- In cases of natural disasters, special conditions will apply for cashing in savings bonds. This is meant to make it easier for investors to access money in times of need
- Taxes are not applicable at the time of purchase. However, they are applicable once redeemed
- For anyone curious about how much their savings bonds are worth the information is readily available online through TreasuryDirect. Alternatively, savings bond holders can check on the current value of their paper loans by inputting a little information into a savings bond calculator