How do Savings Bonds Work


Written by Ariana R. Cherry in Finance
Viewed by 27 readers since 08-30-2009

Purchasing a savings bond is a popular affordable gift that is often given to children at an early age. Most often they are given as gifts that they can later cash in after they graduate high school to use for educational purposes or towards the cost of other future purchases. Savings bonds are often purchased at your local bank or credit union.  They are issued from the United States Treasury Department.  When you purchase a savings bond, it adds up interest over time in which you can later redeem.

Most savings bonds can be purchased for as low as twenty five dollars or even as high as ten thousand dollars. Paper savings bonds are purchased at half of their face value.  If you buy a bond for one hundred dollars, then you only pay fifty. A savings bond is very secure, as it can always be replaced if it has been stolen, lost, or destroyed.

Savings bonds are usually low risk investments. It may take years before they are worth much, and the return is usually somewhat small. Sometimes their worth can be reduced by inflation. Other types of bonds can be purchased that allow them to earn more when inflation is higher. Although, when inflation is lower, then the earnings on a savings bond is low too. One website that allows you to see the current rates, or rates in the past is at the Federal Reserve website. This can help you configure the worth of any current savings bond that you may have.

The interest earned on a savings bond is exempt from state and local taxes, although it is subject to federal taxes. The federal taxes on a bond can be paid annually or be deferred at a later time when it is more convenient.  A person may claim the interest earned on a savings bond when it has matured. A bond cannot be redeemed until at least one year has passed.

Savings bonds are often used to help pay for further education after high school such as college or other continued studies. When savings bonds are used for this, they may be qualified for the Educational Tax Exclusion.  The Educational Tax Exclusion allows a person to exclude all gross income or interest paid from the savings bond that were issued after 1989 if they used it to pay for educational expenses at qualified schools.

The new standard savings bond is now called the “EE bond.” It has replaced the earlier versions which were known as the “E bond.” The bonds that were purchased after May 1st, 2005 now earn a fixed interest rate. The new change made it easier for those who purchased bonds to calculate its worth at any time. The savings bonds that were purchased between May of 1997 and May of 2005 had interest that was based on a five year variable market field. Be aware that if you ever cash in an “EE” bond within the first five years, you can forfeit three months of possible interest earnings.

Savings bonds can also be purchased online electronically. At treasurydirect.gov, you pay for bonds at face value. It will be worth its total face value when it is available to cash in. They can be purchased for twenty five dollars or more. The most you can purchase in a calendar year is $5,000.

If you are looking for a low risk investment, or would like to teach a young person the value of saving money, then a savings bond is a good place to start. Savings bonds are safe, secure, and often can typically earn more than the typical savings account. You can watch the interest build as the years pass, and then eventually redeem it for an important future purchase.


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