As investors seek alternative plans to grow their money in light of the volatile stock market, savings bonds have become one of many popular choices for long-term savings growth. Savings bonds increase the initial investment with an interest rate that is guaranteed by the federal government. However, given that they are an investment plan that relies on the government rather than the private sector, there are many special rules and regulations that only apply to bonds. Therefore, investors should be aware of a few things before purchasing a bond.
Savings bonds accrue interest on a monthly basis at a set rate. This rate is adjusted by the Treasury Department on May and November 1st each year. The standard interest rate that applies to the bond at the time of purchase is set and will not change until it has matured after 20 years. Although this will not take advantage of higher interest rates in the future, it will protects the investor from lower interest rates that could be detrimental to their savings. After the bond has matured for twenty years, the Treasury Department may decide to change the rate for the final ten years. However, series EE bonds are always guaranteed to at least double their value after 20 years, regardless of the interest rate. After that last 10 years (so 30 years in total), your bond stops paying interest.
Types of Savings Bonds
Although many different types of government savings bonds have been issued historically, only three types are offered today. These bonds can be purchased in denominations of $50, $75, $100, $200, $500, $1000, and $5,000, though not all of them are purchased at face value. EE savings bonds are great for those that want a simple investment plan to help strengthen their retirement or save money for education. They are offered at half of their advertised value, meaning that a $200 savings bond can be purchased for $100. The maturity rate (meaning the time when a bond reaches the value displayed on the front) is 20 years, although it can continue to gain interest for an additional ten years after that. Patriot bonds are identical to EE bonds, except that the words “Patriot Bond” are printed on the front to commemorate the September 11th attacks. I Bonds are another type of savings bond that differ slightly from EE bonds. While I Bonds feature a fixed rate, they also come with an adjustable rate that changes with inflation. They are available in the same denominations as EE bonds, but are purchased at face value.
There are some common rules that every type of bond must adhere to. The maximum amount of cash that you can spend on a single type of bond is $5,000 per year (meaning that you can purchase a $5,000 I bond or a $10,000 EE bond). Bonds cannot be redeemed prior to the one year anniversary of its sale unless a natural disaster or other sizeable catastrophe has occurred. If a bond is redeemed before the five year anniversary of its purchase, a three month interest penalty is charged. Savings bonds are all exempt from state and local income taxes, but must be included as income when filing federal income taxes. Bond holders can choose to claim the monthly interest of each bond on their taxes every year or wait until the value of the bond has been redeemed. If the money is being used to pay for qualifying educational expenses, it could be exempt from federal income taxes. These expenses include tuition fees and special training programs that are required for a degree. They do not, however, include the cost of books or room and board.
Figure Out Your Bonds
Now that you know the rules, figure out how much they are worth today, and if they are even paying interest. You can use this calculator from the U.S. Department of the Treasury: