Should I Buy a U.S. Savings Bond?

If you’re a risk-averse investor in search of safety, you’ve probably wondered if you should own a U.S. savings bond. Savings bonds issued by the federal government are an investment option. Like other bond securities, savings bonds pay interest to the owner. Most savings bonds return a relatively low rate of return and may take decades to mature.

There are a variety of savings bonds types. EE savings bonds are considered the most common savings bonds. You purchase EE bonds at a discount to face value and don’t fluctuate in value after issuance. When the bond matures in the future, you receive 100 percent, or par price, of the bond. You aren’t required to hold savings bonds until they mature and may cash them in whenever you’d like. If you sell savings bonds before establishing a five-year holding period, you pay an interest penalty.

Learn more about U.S. savings bonds to determine if these investments are right for you.

Should You Own a U.S. Savings Bond? Series I Savings Bonds

In comparison to Series EE bonds, Series I savings bonds are purchased at face value and earn interest over time. If held for 20 years, Series EE bonds double in value.
You may buy and sell Series I bonds through the Treasury Direct online portal. Series I bonds, like Series EE bonds, may be redeemed before maturity but, if you cash out before the five-year holding period, you forfeit interest on the investment.

If you decide to redeem or cash out a savings bond, you must fill out a redemption form at the bank. The bank is required to report your interest earned to the IRS. Each year you own a U.S. savings bond, you receive a 1099-INT form. You must report the interest earned on your annual tax return unless your savings bonds were used to pay for qualified education expenses.

Should You Own a U.S. Savings Bond? Education Savings Bonds Program

If your parents and grandparents bought Series EE or Series I U.S. savings bonds to fund a future college education and the bonds were issued after 1989, part or all of the interest income earned on your savings bonds may be exempt from taxes.
You or your spouse (if you file a joint tax return) must use the money to pay “qualified educational expenses” such as tuition or fees, such as lab fees, spent to matriculate at an educational institution deemed eligible by the IRS. Books or housing aren’t considered qualified expenses.

Interest may be exempt if you spend interest earned from savings bonds for the benefit of a student dependent or another relative or friend’s qualified educational expenses.
You may also use principal and interest earned from U.S. savings bonds to pay for a course, certificate-granting program, or degree program.

Here’s an example of the tax impact of the Education Savings Bonds Program:
Let’s say you sell USD 10,000 Series EE and Series I U.S. savings bonds that you or the person who gifted them to you bought at age 24 or older. The net proceeds are USD 8,000 principal and an additional USD 2,000 interest. If qualified education expenses total USD 8,000, you may exclude up to 80 percent of the savings bond interest earned. The savings is equal to USD 1,600, or USD 2,000 x 0.8 = USD 1,600.

What you earn can affect how much money you save. There are income limitations on the Education Savings Bond program for single taxpayers and married taxpayers filing a joint return. IRS reports income limits for each tax year on the Treasury Direct website.

Should You Own a U.S. Savings Bond: How to Purchase Savings Bonds

If you’re interested in investing in U.S. savings bonds, the process is relatively simple. If you want to buy popular Series I bonds, ask your employer about payroll deduction plans or purchase bonds through the Treasury Direct website. You can also invest federal tax refund proceeds in Series I bonds. Series I (‘inflation’) bonds are indexed for inflation twice per year (May and November) according to the Consumer Price Index (CPI).

Series EE savings bonds are also simple to acquire. Ask friends and family to buy savings bonds for birthdays and holiday gifts. Make a budget and direct extra sums to Series EE savings bonds. Both electronic and paper versions of Series EE bonds are available.

Should You Own a U.S. Savings Bond: Your Risk Profile

The answer to whether you should own a U.S. savings bond depends on your risk tolerance. If you’re young and just starting to invest, compare rates of return on other safe investment vehicles such as certificates of deposit (CDs) before making a decision to invest.
If you’re retired or planning to retire in the near future, putting a percentage of your safe money in U.S. savings bonds can offer peace of mind. If you like investing in U.S. savings bonds and consider it a patriotic act, your money will grow safely and securely as long as you own them.