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Are Savings Bonds a Good Deal?

Richard Glunt
Are Savings Bonds a Good Deal?

Savings bonds are one of the safest investments available. They're low-risk, are backed by the U.S. government, and offer a secure way for you to grow your savings.

Since savings bonds are so safe, the rate of return is modest. However, they are good choices for people who are drawing near to retirement or who have relatively low levels of risk tolerance.

They also make great gifts for kids, and can help them learn about money.

Are savings bonds a good deal? It depends on your goals and your situation. To help you make that determination, here's everything you need to know about savings bonds.

What is a savings bond?

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You can find the founding fathers on paper savings bonds.

A U.S. savings bond is issued by the U.S. Department of the Treasury and is a debt security. Bonds are issued to help to finance the borrowing needs of the government.

When you purchase a savings bond, you are loaning money to Uncle Sam.

When a savings bond is redeemed, you are repaid the amount that was invested, plus interest — not unlike certificates of deposit.

The different types of savings bonds

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Series EE US savings bonds and Series I US savings bonds.

There are currently two types of U.S. savings bonds available for purchase: Series EE and Series I. A third type, Series HH, is no longer sold but can still be redeemed.

Series EE U.S. savings bonds are also known as "patriot bonds." You purchase these savings bonds at their face value. For example, if you want to buy a $50 EE savings bond, you will pay $50 for it.

Series EE bonds that were issued from May 2005 onward earn a fixed interest rate for up to 30 years. Older EE bonds purchased prior to May 2005 pay a variable rate of interest that is updated every six months.

The interest you earn on your Series EE bonds accumulates and adds to the face value of the bond. When you redeem EE savings bonds, you will receive the full face value, with the earned interest piled on top.

Series I U.S. savings bonds provide protection from inflation, which is what the "I" stands for. Your returns include both a fixed rate of interest plus additional earnings based on the inflation rate.

Like Series EE bonds, Series I bonds are purchased at their face value and will earn interest for up to 30 years, so they're designed to be a longer-term investment. In a single calendar year, you are limited to buying a maximum of $10,000 in I bonds.

Series HH U.S. savings bonds were discontinued in 2004, which means they're no longer available for purchase. But if you have Series HH bonds, you can still redeem them.

Any Series HH savings bonds that have not matured will continue to earn interest at an annual rate of 1.5%, and the interest is paid every six months via direct deposit to your bank account. HH bonds mature in 20 years.

The benefits of savings bonds

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Figure out how savings bonds fit into your investments, and your budget, first.

While savings bonds are commonly purchased as gifts, you might want to find a place for them in your own portfolio because of their long-term gains.

There are several benefits that savers can enjoy from savings bonds:

  • Diversification of risk in your portfolio.
  • Knowledge that your investment is safe.
  • Savings that can grow on a tax-deferred basis.
  • Interest that's not subject to state and local taxes.
  • Other potential tax benefits if the interest you earn is used to pay for qualified educational expenses.
  • No commissions on your investment.

Savings bonds can supplement your retirement savings. With Series EE bonds and I bonds, you can invest up to $10,000 in each type per year, which means heaps more tax-deferred savings beyond the contribution limits of your IRA or 401(k).

The downsides of savings bonds

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Savings bonds can lock up your money.

There's one big thing to consider with savings bonds: They are illiquid, meaning the money you invest is not immediately available if you need it.

If you redeem your savings bonds before five years have elapsed, you will sacrifice some of your interest. So hang in there.

Savings bonds are more for stable, long-term savings than for an unexpected emergency. You should already have an emergency savings fund built up, ideally in a high-yield savings account.

Similarly, you shouldn't redeem bonds before the interest is posted for the month, because you'll miss out on those earnings.

When you have a lump sum of money that you would like to invest for a longer period of time, savings bonds can be an option for avoiding the risks associated with the stock market. (But stocks have the potential for much bigger returns.)

How savings bonds work

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You receive a guarantee that you will be paid interest until they mature.

You can purchase savings bonds electronically on the U.S. Treasury Department's TreasuryDirect.gov website. You purchase the bonds at their face value and receive a guarantee that you will be paid interest until the bonds mature.

You cannot redeem savings bonds for at least 12 months. Then, if you redeem them before five years have passed, you will lose three months' worth of interest.

But if you leave your savings bonds alone, they will continue earning interest for up to 30 years.

This is what makes savings bonds a good gift for children. They'll get to watch their money grow as they — well, grow, and learn how interest works. In 30 years, they'll be thankful for the lesson, and the fully matured bond.

How much is my savings bond worth?

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You'll need to know the date of purchase, the series and the denomination

Your savings bonds earn interest at the fixed rate established in the year they were purchased. The current annual interest rate for new EE bonds is 0.10%.

To learn how much a savings bond is worth, you'll need to know the date of purchase, the series and the denomination.

You can enter your savings bond information into the Treasury's savings bond calculator to determine the current value.

How to cash in savings bonds

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You won't actually get physical cash. The money will be direct-deposited into a bank account of your choosing.

As of January 2019, the government reported that close to $25 billion was sitting dormant in unredeemed, matured savings bonds. If you've got money tied up in old savings bonds, don't let it grow cobwebs!

To redeem electronic EE bonds or I bonds, you simply log into your Treasury Direct account and follow the instructions. The money will be deposited electronically in your checking account or savings account within a couple of business days.

Paper EE and I bonds can be cashed in at most financial institutions. Alternatively, you can mail them into the Treasury Retail Securities Services at P.O. Box 214, Minneapolis, MN 55480-0214.

Investing in savings bonds can be a good strategy if you want low-risk investments and will not need access to your money for a long period of time. They also can help diversify your portfolio while providing an additional avenue of tax-deferred savings.

But be warned: They pay a relatively low rate of return. To get the most from your savings bonds, hold them until they mature — and benefit from compounding interest for better returns.