Understanding Savings Bonds

This page is all about Understanding Savings Bonds. US Savings Bonds were the very first investment vehicle I used for the long-term. It was very easy back when I started my first full-time job. My company would have a yearly flyer go around talking about the benefits of buying US Savings Bonds and we could sign up and have the buy amounts taken right from our paychecks.

This was in the time before we even heard about 401K plans. Every month I would get in the mail the Savings Bond I purchased and into the Savings Bond shoebox it went. Nobody seems to talk about US Savings Bonds anymore. They are still around and are a very conservative and safe investment. Even though earnings isn’t much today in this low-interest rate environment they are still worth mentioning as an investment option because they do have certain benefits that may appeal to the most risk averse investor and are pretty good gifts for your children or grandchildren to help them learn about long-term investing.

That said, they certainly are not the way to invest your way to early retirement but they may fill an investment need in your portfolio.

Savings bond certificates have face-value denominations ranging from $50 to $10,000 and give a long-term inflation-indexed return and do so safely because it is an U.S. government-issued security. They are an easy and guaranteed way to accumulate funds that will mature on a given date. Because you can buy savings bonds in amounts as low as $25 almost anyone can afford to invest.

As an example, a $50 Series EE bond would cost $25 and once mature is redeemed for $50. There are tax advantages and under certain circumstances they can be tax-free when used for education savings. They can also be a good way to support your emergency fund because they are easily redeemed.

Tax Advantages.

Don’t just look at the rate of return because the low-interest rate is somewhat compensated and offset by favorable tax terms. You don’t pay Federal income tax on your earnings until you redeem them and you never have to pay any state or local taxes.

You can hold Series EE and I bonds for 30 years and if they were purchased under your child’s name and redeemed while the child is still your dependent then earnings are taxed at your child’s rate which could be $0 if total income was less than $850. In any case the tax rate would be less than yours.

There are some educational based Federal tax exclusions that has income thresholds, phase outs, and other rules that must be adhered to. If you are interested in using Savings Bonds for educational funding please go to the program at the Savings Bonds for Education website http://www.treasurydirect.gov/indiv/planning/plan_education.htm to find more information.

Understanding Savings Bonds – Types Available Now.

There are two types of Savings Bonds offered today:

  • The Series EE Bond– Issued at half their face value ranging from $50 to $10,000 where at maturity they can be redeemed at their face value. There is a face value maximum purchase of $30,000 annually
  • The Series I Bond These bonds are inflation-indexed and sold at their full face values. Amounts begin with the minimum denomination of $50. Other denominations are $75, $100, $200, $500, $1,000, $5,000, and $10,000.

Both of these bond types can earn interest for 30 years if held that long.

Series EE Bonds reach their face value at around 20 years at today’s interest rates. If held for five years they pay 90% of the six-month average yield on five-year Treasury securities. The new interest rates are announced twice a year taking effect every May 1 and November 1.

Series I bonds were developed to assure investors a rate of return above inflation.

With Savings Bonds you will receive any interest earned and your principal when you cash in the bond.

Understanding Savings Bonds – How to Buy Savings Bonds.

Today the only way to buy savings bonds is through TreasuryDirect (*IRS exception below). http://www.treasurydirect.gov/indiv/indiv.htm

Through TreasuryDirect investors have an easy and convenient way to buy and manage their bonds free of charge.

As a savings bond investor you will no longer have to worry about misplacing, losing or storing paper savings bonds.

Opening a TreasuryDirect account is free and once it’s established, investors can:

  • Buy, manage, and redeem Series EE and I electronic savings bonds.
  • Purchase electronic savings bonds as a gift.
  • Enroll in a payroll savings plan for purchasing electronic bonds.
  • Invest in other Treasury securities such as bills, notes, bonds, and TIPS (Treasury Inflation-Protected Securities).


Knowledge is power and understanding savings bonds is just another knowledge tool in your tool box.

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