What Is a Savings Bond? (Is It a Safe Investment?)

A U.S. savings bond is one of the safest investments a person can make. A bond is a debt obligation that is traditionally considered a safe investment, at least when contrasted with stocks – the more volatile investment vehicle. 

When a person acquires a bond, he/she is loaning a sum of money to the government or a private company for a fixed period of time. At the end of the pre-determined period of time, the principal is returned to the investor (or creditor).

What is a savings bond’s perks for the person lending the money? In exchange for lending this money, the lender receives interest payments which are paid periodically.

How Do Savings Bonds Work? Detailed Overview

How do savings bonds work? U.S. savings bonds are backed by the power of the federal government, which is why they are considered a virtually guaranteed investment. U.S. savings bonds carry a fixed rate of interest over a fixed or variable amount of time. As a result, investors have an idea of how much they will earn from their savings bonds.

How do savings bonds work when it comes to the amount of time you have to wait before regaining your principal? There is a minimum of 12 months. At that time, they can be redeemed for their principal plus whatever interest they have earned by that point.

U.S. savings bonds typically have maturity dates of 15–30 years. They are also only available to U.S. citizens. Additionally, anybody interested in purchasing a savings bond must open a TreasuryDirect account.

how do savings bonds work

How do Savings Bonds Work?

U.S. savings bonds can be purchased in different amounts. There are a number of different U.S. savings bonds rates. Interested investors can purchase them for as little as $25.

There are different kinds of savings bonds depending on when they were issued. You may have heard of Series EE and Series I savings bonds. They are savings bonds that are available for purchase, although they differ slightly in their features. They both offer the value of savings bonds in the sense that they are relatively safe and offer the holder tax advantages. More people have heard of Series EE bonds because they have been around for much longer, but both Series EE and Series I bonds offer unique features.

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Purchasing Savings Bonds (U.S. Savings Bonds Rates)

Values of Savings Bonds: Series EE Savings Bonds

As non-marketable savings bonds, Series EE savings bonds cannot be exchanged in the secondary market. What makes these bonds even more attractive is the guarantee from the federal government that, over the first term, they will double in value. These bonds earn fixed interest.

For older bonds, between May 1997 and April 2005, the rates are variable and change every six months. Bonds issued prior to May 1997 earn their interest depending on the time that they were purchased. Series EE bonds can earn interest for up to 30 years, but cashing in savings bonds is permissible at any time after the 12-month mark.

Series EE bonds are tax-exempt at both the state and local level. While holders have to pay taxes on Series EE bonds at the federal level, they can be exempt if the savings bond redemption is used to fund higher education. Additionally, each individual (in other words, each Social Security number) can only purchase $10,000 worth of series EE bonds per year.

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Value of Savings Bonds: Series I Savings Bonds

Series I bonds (also known as I savings bonds) are a low-risk investment that also serve the purpose of protecting the holder from inflation. The interest earned on a I savings bond is a combination between a fixed rate and an inflation rate. Series I savings bonds are also exempt from state and local taxes but not from federal taxes. Again, paying federal taxes on these bonds can be avoided by using the money from your I savings bonds redemption for higher education.

While people may still be in possession of older Series EE bonds in paper form, Series I bonds are only available electronically unless bought with a tax refund. Each individual (or Social Security number) can purchase up to $10,000 worth of savings bonds in a calendar year. Each person also has the option of buying up to $10,000 in electronic I bonds and then up to $5000 in paper bonds through his/her tax refund per calendar year.

Paper Series I bonds bought with a tax refund can be purchased in denominations of $50, $100, $200, $500 or $1000. Those bought electronically can be bought for any amount over $25 to the penny. So, technically, you could buy a bond for $46.06 if you wished.

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Purchasing Savings Bonds

Bonds are no longer sold physically. Instead, they are sold online. U.S. savings bonds went completely electronic in 2012. Before they went online, however, their registration with the government was another reason why savings bonds were considered one of the safest investments. If a person’s bond was destroyed, lost or stolen, they could be replaced.

Be that as it may, U.S. savings bonds do face a lot of criticism as an investment option or even as a savings vehicle. For many, the value of savings bonds lie in their reliability and restriction of your money, so they have traditionally been gifted by family members to children as a way to help them save for their future or their education.

The biggest criticism of the value of savings bonds is that they provide very little return. As a result, largely relying on bonds – any kind of bonds – as part of your long-term savings strategy is not recommended. People typically switch their stocks over to bonds the closer they get to retirement because the risk is minimal.

Opening a TreasuryDirect Account

The way to purchase savings bonds nowadays is online. You can visit the TreasuryDirect website where you can open an account that allows you to purchase U.S. savings bonds. In order to open an account for buying and cashing in savings bonds, you need a taxpayer identification number or Social Security number if you are opening an account for an individual. You also need an American address, an open checking or savings account, an email address, and an up-to-date browser. You must also be 18 years of age or older in order to have a TreasuryDirect account.

Purchasing a Savings Bond for Somebody Else (Value of Savings Bonds for Friends & Family)

How to Cash in Savings Bonds

How Much is my Savings Bond Worth?

Some people may recognize the value of savings bonds and want to pass them on to a younger family member or sometimes even a friend. Savings bonds can be given as gifts. People buy savings bonds for birthdays, weddings, and graduations.

In order to gift the value of savings bonds to somebody else, the purchaser must first have a TreasuryDirect account. Then the individual can purchase a gift bond within that account and hold onto it until he/she is ready to give it to the recipient. In order to receive it, the recipient will also need a TreasuryDirect account. The purchaser also needs to know the recipient’s full name and Social Security number or Taxpayer Identification Number.

How do savings bonds work when purchased for somebody else? The same as a regular savings bond. The only difference is that an individual is not buying it for himself/herself. In addition, the person buying the savings bond as a gift is required to hold the savings bond in his/her TreasuryDirect account for five business days before transferring the savings bond or bonds to the recipient.

People can also purchase paper U.S. savings bonds as gifts through their tax refund. This is the one exception to the current paperless savings bonds system. Savings bonds can still be purchased through tax refunds, and this also applies to gifts as well. So, if you would like a physical bond to gift to someone you care about, this is an available option.

Related: Are Savings Bonds, Municipal and Treasury Bonds a Good Investment Now?

Value of Savings Bonds (How Much Is My Savings Bond Worth?)

Wondering how to cash in savings bonds you may have forgotten about? Not to fear – the money is still there for you to reclaim.

As mentioned, many people receive savings bonds as gifts from relatives at special milestones, like birthdays or graduations. As such, many people forget they even own savings bonds and potentially hold on to them way past their date of maturity. The value of savings bonds becomes stagnant if it passes its maturity date since you are basically allowing the government to have your money for free.

However, before you even try to find where to cash savings bonds, you may be asking, “How much is my savings bond worth?” It is a good idea to figure this out in advance so that you can be certain you are getting the right amount when you initiate your savings bond redemption.

There are a number of tools available to do this. If your bonds are electronic, then you will be able to easily figure out the value of savings bonds you hold right in your TreasuryDirect account. Simply click on the “Current Holdings” tab and you can see the information conveniently displayed.

If you only have paper copies of your savings bonds, it will take a little more work to figure out the current U.S. savings bonds rates, but it is still quite easy. Simply visit the TreasuryDirect website and access the online calculator. Using this tool, you can easily calculate the price of Series EE, Series E, and Series I savings bonds in addition to Savings Notes.

You can see the current interest rate of your savings bond, the final maturity date, the next accrual date, and your year-to-date interest earned. You can also see what your bonds were worth in the past or what they will be worth in future months.

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How to Cash in Savings Bonds (Converting Paper Bonds)

To know how to cash in savings bonds and whether you will face any penalties, you need to look at how long you have held the bond. For starters, you need to have held the bond for at least 12 months. For both series EE and series I bonds, if you redeem the bond before five years, you will face a penalty. Those who redeem their bonds before five years do not receive the last three months of interest payments.

If you have an EE bond, you should redeem it as soon as possible. All Series EE bonds have stopped earning interest. While you can no longer buy paper savings bonds, cashing in savings bonds that you have in paper format is still possible. Visit a local financial institution or mail them to the Treasury Retail Securities Site in Minneapolis.

For electronic bonds, either series EE or series I, bond holders can simply follow the directions on their TreasuryDirect account, and the owed amount will be deposited in their linked checking or savings account within two business days.

Read More: How to Buy Corporate Bonds – What You Need to Know (Prices, Bond Market, Rates, and Sale)

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