First Person: The Pros and Cons of Savings Bonds

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Some people sing the praises of savings bonds; others scoff at these bond holders. I neither lover nor hate savings bonds as I can find both the benefits and downsides to these investment vehicles.

As a holder of such bonds for nearly two decades now, I've learned quite a bit about government savings bonds and have experienced the pros and cons of being a savings bond holder.


Tax benefits

Savings bonds can offer some significant potential when it comes to tax benefits. According to the Treasury Direct website, these bonds, "…are exempt from taxation by any State or political subdivision of a State, except for estate or inheritance taxes." And while they are subject to federal tax, that tax can be deferred until the bond is redeemed, and may even be exempted from federal taxes if used for certain educational purposes.

To learn more about tax considerations, visit the Treasury Direct website.

Inflation protection

While initially the inflation protection offered by the series I savings bonds can be viewed as a positive, it kind of depends upon the spending habits of the bond holder. Since the US government determines what the inflation rate is, it can skew how valuable the inflation protection really is. Just because the rates of the savings bonds are beating the government determined rate, it doesn't necessarily mean it's keeping up with an individual or family rate.


Time constraints

There are certain time constraints that go along with buying government savings bonds. According to the website, there is a minimum one-year term of ownership for EE and I series bonds, and an early redemption penalty of the most recent three months' interest if redeemed before five years. These bonds will however, earn interest for a 30-year period.

Boring investments

Savings bonds don't quite carry the investing excitement that stocks or commodities do. Their values don't fluctuate, and the chance of getting rich quick isn't there. While this can be a positive aspect of the investment as well, as it provides stability in the investment, bonds aren't exactly what you might consider "sexy".

They're forgettable

I can tell you first hand that savings bonds are not on our family's list of investments to check upon regularly. I can also vouch for the fact that we have several such bonds sitting in our safe deposit box that have reached maturity, but that we just don't want to deal with exchanging due to their low values and the time and trouble that can be spent exchanging paper bonds.

Even with such downsides though, I still think that government savings bonds can be a nice addition to an investment portfolio and can provide safety and security in what can be a risky investment world.

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The author is not a licensed financial or tax professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.


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