Interest on U.S. Savings Bonds is very low and this savings vehicle doesn’t make sense in a higher risk investment strategy. However, for some people, savings bonds can be a safe and automated approach for saving money. Savings bond interest rates are fixed for the life of the bond, currently at .30% for Series EE bonds issued through October 31, 2015, so timing your purchase could help substantially. If interest rates rise, the bond rates may be adjusted, and this investment vehicle could become more attractive.
Current advantages of savings bonds are:
- Save automatically. You can do this on your own, or save with automatic payroll deductions (if your employer offers direct deposit) or authorized bank withdrawals.
- Diversify your risk with a safe investment. If you invest in stocks and bonds in your retirement program, you may want to diversify with no-risk savings bonds.
- Avoid paying commission. Purchasing saving bonds doesn’t require the services of a broker or institution that traditionally charges a commission for stocks and some mutual funds.
- Invest a minimal amount. You can purchase a savings bond for $25, and your contribution will be used to purchase a partial bond if applicable.
- Pay no or lower taxes. The interest you make is the difference between the purchase price and the redemption value of the bonds. At maturity, the bond is generally worth twice the purchase price. Interest income on bonds is subject to federal income tax but not state or local income taxes. Also, you don’t pay any tax on the earnings until you redeem the bond.
- Educational tax benefits. The Education Bond Program allows interest to be completely or partially excluded from federal income tax when the bond owner pays for qualified higher education expenses at an eligible institution or state tuition plan in the same calendar year the bonds are redeemed. Note that there are income limitations for higher earners that can reduce the interest income exclusion.
- Electronic tools for tracking. The site at treasurydirect.gov offers many tools to catalogue your bonds and determine the current interest status. You can automate savings and have bond proceeds deposited into your regular bank account
Some unattractive features of savings bonds include:
- Penalties for early redemption. Savings bonds are meant to be long term investments. If you cash in your savings bonds after only holding them for six months, you’ll forfeit three months of interest! And, the bonds stop paying interest after 30 years from issuance.
- Cautions on timing of redemption. Check the US Treasury site to confirm when interest is posted. You can lose interest if you redeem ahead of the next accrual date.
US Savings Bonds may be worth a look for your savings strategy. There is a wealth of information on the Treasury Direct site – https://www.treasurydirect.gov – to help you determine if this savings vehicle makes sense for you.