Backed by the full faith and credit of the U.S. government, U.S. savings bonds have long been regarded as one of the safest types of investments.
Issued by the U.S. Department of Treasury, savings bonds provide money to help the government pay its borrowing needs. Originally created in 1935 to help cover the mounting day-to-day costs of running the government, savings bonds today are low-risk investments often given away as gifts. They can also be used to pay for higher education needs and supplement retirement funds. Savings bonds are issued in two separate varieties:
Series EE U.S. Savings Bonds: These investments earn a fixed interest rate for up to 30 years. The interest rate is set by the Treasury Department twice a year, so investors know exactly how much interest the bond can earn over its lifetime before they even buy it. The current interest rate for Series EE bonds is an annual rate of 0.20 percent. Investors can buy between $25 and $10,000 in EE bonds each calendar year. The bonds are sold for face value, which means a $25 investment gets a $25 savings bond. These types of bonds are meant to be long-term investments and impose penalties on those who try to redeem early. While they can be cashed in after just one year, investors who don't wait at least five years before redeeming them lose out on the last three months of interest. There are no penalties after five years.
Series I U.S. Savings Bonds: These bonds earn interest based on a combined fixed rate and inflation rate. As with Series EE bonds, the fixed rate is set when the investor purchases the bond. The inflation rate is adjusted every six months. Investors can buy between $25 and $10,000 in I bonds, which are sold at face value, each calendar year. I bonds are also meant to be used as a long-term investment strategy. Cashing out I bonds before five years incurs the same penalties as with EE bonds.
While investors formerly were able to buy savings bonds at most any bank or post office, that is no longer the case. Starting in 2012, the government discontinued paper savings bonds, instead issuing all bonds electronically. Since they are sold electronically, bonds can now be purchased in penny increments. Previously when in paper form, bonds were only available in specific denominations.
History of savings bonds
Designed for small investors, savings bonds were first introduced in the United States by then-Treasury Secretary Henry Morgenthau, Jr. The original savings bonds, called "baby bonds" at the time, were issued in four different series – A, B, C, and D – between 1935 and 1941. They were sold in in denominations from $25 to $1,000 at 75 percent of face value, and paid 2.9 percent interest when held onto for 10 years.
In 1941, at the start of World War II, President Franklin Roosevelt introduced the Series Defense Savings Bond. Known as the "War Bonds," the new investments were a way for everyday citizens to support the war. By 1951, the government was offering H Bonds, which paid interest every six months for as long as 30 years. The H Bonds were eventually replaced by the Series HH Savings Bond in 1980. The HH bond had its interest rate locked in for the first 10 years when they were purchased and then had them reset after a decade to the current rate at the time. After a decade, the rate was reset by the Treasury Department for its remaining life.
Also in 1980, the Series E bonds were replaced with the EE series. As a way to boost college participation, the government declared that any Series EE Savings Bonds purchased on or after January 1, 1990 were tax-free if used to pay tuition and fees at eligible educational institutions. The Series I Savings Bond was first introduced to investors in 1998 as a way to encourage Americans to save more without worry of inflation. In 2012, the government eliminated paper savings bonds, instead issuing both the EE and I series bonds only electronically through the Treasury Direct website.
Benefits of savings bonds
There are several key benefits to investing in savings bonds, including some tax advantages. First, investors don't have to pay any state and local taxes on the interest accrued, and don't pay federal taxes until the bonds are redeemed or fully matured. In addition, parents can be freed of any federal tax on the interest earned from a savings bond when it used for certain educational purposes, such as college tuition fees.
Safety is another benefit to investing in savings bonds. Since the government backs them, investors are assured that the bonds will never fail or lose money. The bonds can never be cashed in for less than what the investor paid for them. In addition, savings bonds are easy to redeem. Today's electronic versions can be redeemed through the Treasury Direct website, with funds deposited in the redeemers checking or savings account within one day.