United States Savings Bonds
U.S. savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government's borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
- Minimum purchase: $25
- Maximum purchase: $10,000 per person per bond type per year for electronic securities. $5,000 per year for paper I-Bonds.
- Fixed rate for EE-Bonds, set upon purchase (with 3.5% minimum if held for 20-years).
- Fixed rate for I-Bonds, set upon purchase plus an additional rate based on inflation, adjusted every 6 months.
- Minimum term of ownership: 12 months
- Early redemption penalty: forfeit three most recent months' interest if cashed before 5 years
- Quirks: If one buys savings bonds at the end of the month, one can still receive interest for the whole month regardless of the purchase date.
On February 1, 1935, President Franklin D. Roosevelt signed legislation that allowed the U.S. Department of the Treasury to sell a new type of security, thus the savings bond was born. One month later, the first Series A savings bond proceeded to be issued with a face value of $25. At first, the main purpose was to help finance World War II; these were referred to as Defensive Bonds. On April 30, 1941, Roosevelt purchased the first bond from Treasury Secretary Henry Morgenthau, Jr.. The next day, they were made available to the public. After the attack on Pearl Harbor, Defensive Bonds were informally known as War Savings Bonds, and citizens could buy the bonds for a dime. All the revenue coming in from the bonds went directly to support the war. Even after the war ended, savings bonds became popular with families. Unlike before, people started to just wait to cash them so the bonds would grow in value. To help sustain post-war sales, they were advertised on television, films, and commercials. When John F. Kennedy was president, he encouraged Americans to purchase them, which stimulated a large enrollment in savings bonds. By 1976, President Ford helped celebrate the 35th anniversary of the U.S. Savings Bond Program. The film, "An American Partnership" honored the role of citizens in financing the nation's growth. In 1990, Congress created the Education Savings Bond program which helped Americans finance a college education. A bond purchased on or after January 1, 1990, is tax-free (subject to income limitations) if used to pay tuition and fees at an eligible institution.
In 2002, the Department of the Treasury's Bureau of the Public Debt made savings bonds available for purchasing and redeeming online. Finally, on January 1, 2012, banks and other financial institutions terminated their sales of bonds. Currently, Americans can only buy U.S. savings bonds online at http://www.treasurydirect.gov/.
Savings bonds come in eight denominations: $25, $50, $75, $100, $200, $500, $1,000, and $5,000. After purchase, the holder must wait at least twelve months before cashing it in, when they will receive the principal amount (the purchase price) plus some interest. The maturity periods can vary. For example, if you buy a bond with a value of $50 for $25, you'll have to wait at least 17 years to get your investment back from the government, depending on the interest rate. The longer you wait, the greater interest you earn, however savings bonds have a 30-year maximum of interest accrual. After 30 years, the bond no longer accrues interest. Savings bonds are protected because they are secured by the U.S. government. The principal and earned interest are registered with the Treasury Department, so if a bond is lost, stolen, or destroyed they can be replaced at no cost. Savings bonds can also have value as a collectible since the government stopped issuing them in paper form.
Tax benefits of savings bonds
Savings bond interest is tax deferred. This means that you pay tax only when the bond is cashed (or stops earning interest after 30 years). Interest is taxable by the federal government but not state or local governments. Using the money from a cashed savings bond for higher education may keep you from paying federal income tax on your interest.
Current bond types
There are two types of savings bonds: EE-Bonds and I-Bonds.
- EE-Bonds are fixed interest bonds guaranteed to double in value over 20 years. The rate is fixed upon purchase. Tax is deferred until the bond is cashed. The maximum amount that can be purchased is $10,000 per person per year in electronic form.
- I-Bonds have fixed and variable rate components. The fixed rate is set at the time of purchase. The variable rate is adjusted every six months based on consumer price inflation. The variable rate can be less than zero in times of deflation but the combined rate cannot be less than zero. The maximum amount that can be purchased is $10,000 per person per year in electronic form. An additional $5,000 can be purchased by using one's income tax refund on Form 1040.
Bonds require the purchaser to have a Treasury Direct account, which requires a social security number, a checking or savings account, and an email address. The purchaser can select the owner of the security and the amount of the savings bond. After submitting an order, a message confirms the money will be taken out of the account within one day. A record of the savings bond purchase is placed in the purchaser's account, as paper bonds are no longer issued.
Bonds can be purchased as gifts. The social security number of the receiver need not be known at the time of purchase. A receiver must create a treasurydirect.gov account in order to receive the gift.
- This article describes the new and improved way to purchase savings bonds as well as helpful statistics on the matter: Bortz, Daniel (September 2011). "Bye-bye, paper savings bonds" (PDF). U.S. News & World Report. 40 (8): 128. Retrieved 2017-03-01.
- Code of Federal Regulations (CFR) Department Circulars, 31 C.F.R. § 353: this U.S. Regulation describes what can and cannot be done concerning savings bonds. It provides the rules and what can happen if someone were to break those rules. It also provides long sections of clear cut information so it will be hard to misinterpret or misunderstand.
- Miller, T. (2003). Kiplinger's Practical Guide To Your Money. Washington DC, US: Kiplinger Washington Editors Inc. ISBN 141951752X.: this book includes a section on savings bonds with detailed information. It specifically talks about why someone should purchase savings bonds, where to buy them, how much they can increase in value, and how much it costs to buy one.