How Do Savings Bonds Work? Savings Bonds Basics
With the state of the economy, more investors have started looking to savings bonds as a safe haven for their money. In reality, no place is safe these days. However, bonds are the best option. So how do savings bonds work exactly?
The reason savings bonds are safer and have less risk associated with them, is that they are debt obligations of the US government. They also have a market rate of return that is compounded semi annually, and accrued monthly during the life of the bond. Bonds are backed the US Treasury, and are closely monitored by the Bureau of Public Debt, which makes them risk free.
So exactly what are the advantages of buying savings bonds? Here are a few of the main ones:
Savings bonds have a competitive interest rate. Of course, depending on the bond, there are some that are adjusted for inflation while other bonds have a discount with a maturity date of 17 years. Another advantage is the monthly interest accrual. A bond’s interest payments accrue every month and are compounded twice a year which results in a faster growth in your investment.
US savings bonds have deferred and tax exempt benefits. The interest that is earned on bonds is exempt from all local and state taxes. Federal taxes are deferred, and only paid upon maturity of the bond. This is a great advantage to investors who are in a higher tax bracket, or in regions with a higher local and state tax. In addition, if the bond is used to pay for any educational expenses of the bondholder, their spouse, or a child, the interest can be exempt from federal taxes.
Bonds can be purchased in many different amounts from $10 upwards to $10,000. Keep in mind that the US government has a limit on the amount of savings bonds that can be purchased in a year. Currently, any individual can purchase up to $15,000 in savings bonds each year.
It’s very easy to buy savings bond. You can buy them at any bank with a credit card, and also on the website of the Bureau of Public Debt. Bonds can be redeemed at any bank with the proper identification even if the bond does not belong to you.
Savings Bonds cannot be redeemed under six months. Keep in mind that even if you redeem one after six months, you may have to pay penalties. Bonds are usually held at least five years before they are redeemed.
