Savings Bond 101: A Quick and Easy Guide to Savings Bond Investment
The U.S. government backs U.S. savings bonds with its full faith and credit. They are one of the most basic ways to invest money. Here, we’ll talk about what savings bonds are, how they grow in value over time, how to figure out how much your savings bonds are worth, and how to cash them in.
Understanding Savings Bonds
The U.S. government sells savings bond to pay for the money it needs to borrow. When you buy a U.S. SB, you are essentially lending your money to the government at a certain rate of interest. The government is responsible for paying back the loan in full, including the principal and the interest.
Because the U.S. government backs savings bonds, they are seen as low-risk investments. In other words, there is a very small chance that the U.S. government won’t be able to pay back its savings bond debts. So, the risk for an individual investor is also very low, especially compared to investing in the stock market.
When you buy a savings bond, you’ll get interest that keeps growing. With the two main types of savings bonds, Series I and Series EE, you earn interest that compounds every six months. This means that interest is added to the principal amount every six months. Then, interest is calculated on the new, higher principal amount for the next six months. The only government bonds that earn interest on top of itself.
This type of bonds are tax-deferred, which means that you don’t have to pay taxes on the interest you get from them. You’ll only have to pay tax when you cash in the bond, which is called “redemption.” You can choose to report the interest as it comes in over the life of the bond, but you won’t have to pay tax until the bond is cashed.
The state and local governments do not tax Series I and Series EE bonds either. That means you’ll still have to pay tax to the IRS, but you won’t have to pay any more tax after that. Also, if you buy these bonds when you were at least 24 years old and use them to pay for qualified education costs, you won’t have to pay federal tax on any interest you earn on the bonds.
You can name a survivor as the beneficiary of the bond. If you died unexpectedly, that person would become the owner right away. The bond could be cashed in or reissued in the survivor’s name, or the survivor could do nothing and hold on to it until it matures. If no one is named as a survivor, this would be added to the estate of the person who died, just like any other asset that doesn’t have a named beneficiary.
You can buy savings bonds.
U.S. SB don’t have crazy high limits on how much you can buy, so adding them to your portfolio can make sense in some situations. With just a little bit of basic information about this, you can decide if they are right for you.
Remember that this are a safe way to invest your money. This means that you’re not likely to lose any money, but you also won’t become a millionaire just by buying savings bonds. Savings bonds usually make sense when they are part of a diversified investment portfolio with a clear goal.
Any way you look at it, it’s a good idea to learn the basics of this bonds and think about them as an investment.
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