Savings bonds are often purchased as a gift. If a friend or relative is having a baby, for example, you can give a savings bond as a gift for the new child. The child can then cash it in whenever they want, like when they graduate from college or want to buy a home of their own. They will receive the original investment, plus whatever interest was earned. Alternate names: Treasury bonds, Series EE bonds, Series I bonds
How Savings Bonds Work
There is a process for how savings bonds affect both you and the government, all of which is detailed below.
Buying bonds
To buy savings bonds, you can purchase online directly through TreasuryDirect.gov. You’ll create an account and then select the type of savings bonds you want to buy, either Series EE or Series I. Both types are bought at face value, which means you’ll pay $50 for a $50 bond. You can buy any amount in savings bonds, even down to the penny, with a minimum of $25 for online payments. You can buy a bond online at any time and even set up recurring debits from your bank account if you want to buy bonds on a consistent basis. You can register bonds in your own name or as gifts to others. If you choose the latter, the recipient will also need a TreasuryDirect account, but you can still purchase bonds for them until they complete their account registration.
Redeeming bonds
You can redeem your bonds anytime after the first year of purchase. Keep in mind, though, that you won’t get the full interest if you cash in before five years. You can earn interest for up to 30 years.
Interest
The interest you earn depends on the series you buy and when you buy it. For instance, if you buy $1,000 in Series EE bonds, it will be twice as much as what you paid for it when you cash out in 20 years, regardless of the rate. The Series I interest rate changes every six months based on its fixed rate and inflation, affecting the return. Currently, Series I earns interest at 3.54%. Interest is earned every month and compounded twice a year until the bond reaches 30 years or you cash it in, whichever comes first.
Taxes
Savings bonds are exempt from state and local income taxes. When you complete your tax return, you’ll report interest either every year or whenever one of these things happens first: the bond matures, you cash in the bond, or you give up ownership and the bond is reissued.
Types of Savings Bonds
There are two types of savings bonds you can buy right now: Series EE and Series I.
Series EE: These types of bonds earn fixed interest and right now are at 0.10%. After 20 years, your bond will be worth twice as much as you paid for it, regardless of the rate. You can buy at least $25 in Series EE bonds, paying the face value of it. You can only buy Series EE online. Series I: This type of bond earns both a fixed interest and a rate that is set twice a year based on inflation. If you buy one right now through October 2021, you’ll get a 3.54% interest rate. You can buy Series I electronically or in paper form through your federal tax refund. You can buy up to $10,000 in Series I bonds if you purchase online, but up to just $5,000 if you buy paper bonds.
Savings Bonds vs. Traditional Bonds
Savings bonds and traditional bonds are similar but not quite the same. Here’s how they differ:
Savings accounts: These accounts have one of the lowest rates of return. Some of the best savings accounts right now have annual percentage yields less than 1%. Compare that to the stock market, where you can expect a 10% average return. Keep in mind that investing in the stock market carries more risk and you could potentially lose money. Placing funds in a savings account limits the risk. CDs: Certificate of deposit accounts are available at banks and have various terms, with some ranging from three months to five years. These accounts also never lose money, but you don’t have immediate access to them—you can only access them when the terms end. CD rates are about the same as savings accounts, but the longer your term, the higher your annual percentage yield (APY).
