A savings bond is a type of saving product issued by the U.S. government as part of its normal funding process. Besides savings bonds, the government raises money through other products, such as Treasury bills and Treasury notes, both of which have different maturity dates – that is, when authorities pay you the principal bond amount back.
Historically, savings bonds have played an integral role in the country's war effort, helping authorities marshal enough resources to fund military initiatives on multiple fronts and in various nations and continents. Savings bonds can be a good investment product for you, but before you jump on its bandwagon, learn more about the product, its pros and cons, and where they are available.
What Types of Savings Bonds Are Available?
There are two types of savings bonds: Series EE and Series I.
Series EE Bonds – If you buy this type of bonds, you receive interest on a monthly basis, and the interest can be fixed or variable, depending on market rates and the U.S. Treasury's benchmark rates. You can ask more information about the applicable interest rate at the time of purchase. You can purchase Series EE bonds electronically, and the government guarantees that the amount you invest will double every 20 years and that you can earn interest for 30 years.
Series I Bonds – Similar to Series EE bonds, Series I bonds generate interest for 30 years, but the government does not guarantee that the amount you invest will double in 20 years. The interest rate on this bond is fixed or variable, depending on market conditions and U.S. Treasury recommendations. You can buy Series I bonds electronically, through your bank or directly via the Treasury's portal. You also can purchase them through tax refunds if you specifically instruct the Internal Revenue Service to do so. Check with your tax accountant to learn more about using your refund money to purchase savings bonds.
Where Can I Buy Them?
You can buy Series EE and I bonds from your bank, and the government constantly tries to expand the network of institutions carrying this type of investment product. Talk to your banker and ask him or her more information about savings bonds in general, how you purchase them, when interest will be credited to your account, and whether you can link your checking and savings accounts with the account holding the savings bonds. Procedures vary by institution, but most commercial banks make it easy for people to buy, hold and cash in savings bonds, in accordance with U.S. Treasury stipulations.
You also can buy savings bonds directly from the U.S. Treasury through its TreasuryDirect portal. Generally speaking, I like savings bonds because the potential investor pool is vast, and kids also can purchase them. So that is a good way to build up a small nest egg for your children. There are various denominations of savings bonds you can buy, with face values ranging from $10,000 to $25.
Can I Cash In My Savings Bonds?
There are restrictions on when you cash in savings bonds and how much interest is credited to your account. You can only redeem your savings bond – that is, cash it in – after you have held the investment for at least 12 months. If you cash in before five years, you will only get your principal investment and will lose the interest that has accrued on the account up to the withdrawal period.
You will get the full interest generated by the investment if you wait for the full term of the bond, which can be 10, 20, 30 years or anything in between. Let's clarify this a bit more. Suppose you buy $10,000 worth of savings bonds, and the maturity date is 10 years. Read the below scenarios to see what you could lose or gain.
- 9 months from the date of purchase, you need the money for something urgent – You cannot withdraw any cash; the account is kind of "locked."
- 15 months from the date of purchase, you still need your money to take care of that problem that still is lingering – You can access your funds, but you will lose interest that has accumulated over 15 months. You only receive the initial amount invested.
- 4 years and 364 days from the date of purchase, you need your cash – You can cash in your savings bond, but you'll lose all interest accrued during this time. (Think about it; this is one day before the 5-year mark, so be patient if you can.)
- 5 years or more from the date of purchase, you want to cash in – No problem; you get all your money, that is, the initial amount invested plus interest that has accumulated during the holding period.
The bottom line is: the government wants you to hold a Savings EE or I bond for at least five years.
Are Savings Bonds Better Than Other Savings Products?
Not necessarily. It all depends on your investment profile, personal situation and long-term goals. The interest you earn with a savings bond is not taxable at the federal, state and local levels – so that's more money in your pocket. By contrast, you pay taxes on traditional savings products, such as money market accounts, savings accounts and certificates of deposit. However, the interest rate set by the U.S. Treasury typically is lower than or equal to market rates. Unlike traditional savings products, you can access your money at any time, subject to penalties in certain cases, such as CD contracts.
Here is you should take away from this Savings bonds review:
- You earn interest monthly
- You can quickly open the amount, through your bank or TreasuryDirect
- The investment is risk-free and backed by the U.S. government
- You don't pay tax on interest earned
- You cannot withdraw your money unless 1 year has passed after account opening
- If you cash in before 5 years, you lose whatever interest accrued up to the time of withdrawal
- The interest rate may be lower that rates you would find on other savings products