Searching for low-risk savings products can be a frustrating experience for many people. If you’re tired of negligible returns on your savings, buying a U.S. savings bond can help. U.S. savings bonds are obligations of the U.S. government. They’re as safe as your FDIC-insured savings account because they’re backed by the full faith and credit of the United States.
U.S. Savings bonds are exempt from state and/or city taxes because they’re issued by the federal government. It’s possible to defer taxes on income earned because you don’t receive coupon interest. In comparison, interest earned in a traditional savings account or from CDs is taxed as income. Savings bonds can be part of your tax savings and financial planning strategies.
How to Buy a U.S. Savings Bond: Capital Preservation Strategy
Capital preservation is an important reason to own U.S. savings bonds. Even if stocks and equity-related investments are part of your portfolio, you probably don’t want to expose one hundred percent of your financial assets to risk. If you’re nearing retirement or already enjoying retirement, perhaps a certain amount of your assets are being taken off the stock investing table. You’re looking to stabilize assets and generate income from them.
Classic investments for capital preservation include FDIC insured savings and deposit products, money market accounts—not money market funds—and certificates of deposit. These tools allow you to preserve the nominal value of cash less costs or fees associated with the account.
A portion of these “safe money” assets may be invested in U.S. savings bonds if your time horizon and need for current cash is slightly longer. In exchange, you’ll receive a higher interest rate than many other savings instruments.
How to Buy a U.S. Savings Bond: Interest Rates
Interest rates change according to key economic factors and the interest you earn on a U.S. savings bond varies. There are different series of U.S. savings bonds, including fixed and variable rate bonds. Series I bonds (in which I represents inflation) is designed to protect principal from the impact of inflation.
- The variable inflation rate is computed twice per year by the U.S. Treasury. Interest is earned monthly and is compounded semiannually. Calculate interest earned on I bond with the Treasury Direct Savings Bond Calculator.
- The rate is based upon changes in non-seasonal-adjusted Consumer Price Index for all Urban Consumers, or CPI-U, including costs of food and energy.
- Series I bonds are intended to be held over a long-term period. This series of U.S. savings bond earns interest for up to 30 years.
- It’s possible to cash in bonds after a 12-month holding period but there’s an interest penalty.
- You lose the previous three months’ interest if you cash in Series I savings bonds at one year. For instance, if you cash a Series I U.S. savings bond in after holding it 18 months, you receive 15 months of interest.
- After a five year minimum holding period, you may cash in the bonds without an interest penalty.
Series EE bonds are similar to Series I U.S. savings bonds but they are issued at a discount and aren’t adjusted to inflation.
How to Buy a U.S. Savings Bond: Treasury Direct, Payroll Deduction, Tax Refund
It’s easy to buy a Series I U.S. savings bond if you’re employed and your employer offers payroll deduction to buy U.S. savings bonds:
- The minimum purchase is USD 25 for one Series I U.S. savings bond. Series I bonds are sold at face (full par) value. Like Series EE savings bonds, you can purchase paper or electronic savings bond formats.
- The maximum purchase is USD 10,000 per calendar year/Social Security number. You may purchase up to USD 10,000 in electronic form.
- Up to USD 5,000 I bonds may be purchased directly with your federal tax refund.
U.S. savings bonds may be used for higher educational purposes. Series I and EE bonds issued after 1989 allow the owner to redeem savings bonds without the impact of federal taxes on interest earned. The owner must use funds from redeemed bonds for qualified educational expenses. See IRS Form 8815 for more information.
How to Buy a U.S. Savings Bond: Your Portfolio
If you’re asking how to buy a U.S. savings bond as a gift or for someone else, your financial objectives and portfolio return goals don’t apply. Buying a U.S. savings bond for another person is always an excellent choice.
If you’re a young investor with decades until retirement, consider buying a U.S. savings bond only for the “safe money” portion of your portfolio or for an emergency fund. Savings bonds do earn higher returns than most savings accounts but, when compared to a variety of long-term investments like equities in your IRA or 401k retirement accounts, the rate of return is quite low. Historically, stocks and equity-related investments like index ETFs and stock mutual funds have earned many hundreds of basis points’ more on average per year than savings bonds.