Good Investment or Boring Underperformer? It would be a challenge to find a less sexy investment than US Savings Bonds (unless it’s passbook savings accounts), yet Savings Bonds are purchased by one in five Americans. Since Savings Bonds have greatly underperformed the stock market for years, why do so many people buy them?
And should they? (Note: for an update on changes to Series EE Savings Bonds, see financialplan.about.com/
What Has Uncle Sam Done To US Savings Bonds? Savings Bonds are appealing to investors for several reasons:
• Since they’re backed by the full faith and credit of the US government, they’re one of the safest investments.
• They’re free of state and local income taxes, which increases their effective yield.
• They’re federal tax-deferred (taxes are paid when the bonds are sold), allowing you to claim the income at a time when you are in a lower tax bracket.
• Bonds purchased since January of 1990 may be free of federal tax altogether if used to pay for a child’s college tuition, if the parents fall within the eligible income levels.
While the interest rate earned on Savings Bonds is low compared to the historical performance of the stock market, if your primary concern is protecting your principal, saving for a child’s education, or generating tax-deferred income for retirement, they may have a place in your portfolio.
When the stock market is not performing well and interest rates on savings and Certificates of Deposit are low, savings bonds are even more attractive to many investors.
However, they should be used to supplement your 401(k) or other retirement plan, and not as the basis for your retirement.
While you won’t get rich by investing in US Savings Bonds, you won’t lose your shirt either. The best way to take advantage of them is to understand how they work. Most of the information in this article refers to Series EE Savings Bonds.
For an explanation of the differences between Series EE and Series I Savings Bonds, see
A bond is a loan to a company or government agency, which agrees to pay it back at a fixed rate of interest over a fixed period of time. When you purchase a US Savings Bond, you’re lending money to the United States. The purchase price is one half of the face value of the bond. For example, a $100 bond costs $50.
Where Can I Buy US Savings Bonds?
Series EE Savings Bonds can be purchased in several ways:
• Through any bank or financial institution that serves as a Savings Bonds Agent.
• Through a payroll savings plan offered by many employers.
• Online, through the US Treasury Department’s www.treasurydirect.gov.
What Interest Rate Does a US Savings Bond Pay?
Over the years, the Treasury Department has changed the way interest on savings bonds is calculated a number of times. Series EE Bonds purchased after May 1, 2005 earn an interest rate that remains fixed for the life of the bond, instead of changing every six months as they used to.
Series EE Savings Bonds issued prior to May 1, 2005 will continue to earn interest under the terms in effect when they were issued.
The best way to determine the rate for www.publicdebt.treas.gov is to use the Treasury Department’s free software, about.com. www.publicdebt.treas.gov.
How Long Does It Take Savings Bonds to Reach Their Face Value?
The original maturity (the period of time it takes a bond to grow from its purchase price to its face value at its guaranteed interest rate), varies with the Treasury notes’ variable market rate, so it’s impossible to predict the maturity date in advance.
The higher the market rate, the faster the bond matures. In no case will the a Series EE bond take more than 20 years to mature.
In the past, it’s been difficult to assess the current value of your Savings Bonds, but the US Treasury Department now offers a free software program called the which allows you to maintain an inventory of your bonds and determine the current redemption value, interest earned, interest rate, and more.
There are also to help you calculate the current value of your Bonds.
How Long Do Savings Bonds Continue To Earn Interest?
Series EE Savings Bonds continue to earn interest for 30 years (their final maturity), although they usually reach their face value no more than 20 years.
How Can I Redeem (Cash-in) My Savings Bonds?
Series E and EE Bonds can be redeemed at most banks and financial institutions, unless the bond is issued to a guardian or trustee, a corporation or other type of company or institution.
In these instances, the bonds have to be redeemed at a Federal Reserve Bank or the Bureau of Public Debt.
Stay tuned for details of changes being planned for Savings Bonds that may make them less appealing in 2005.
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