U.S. savings bonds have played a major part of history in the United States. You may wonder, what is a U.S. Savings Bond? Simply put, they are debt securities issued by the United States Department of the Treasury to raise funds for the U.S. government’s borrowing needs. These may include capital projects and other necessary operations to manage the economy.

U.S. savings bonds guarantee savers a modest but guaranteed return. These bonds are issued with zero-coupon at a discount with an implied fixed-rate interest over a fixed period of time. Before we talk about the investment benefits, allow CentShifter.com go into the history of the U.S. Savings Bond.

History of the U.S. Savings Bond

The history of the U.S. savings bond can be traced back to the times of the Great Depression in the year 1935. At that time, President Franklin D. Roosevelt signed legislation allowing the U.S. Department of the Treasury to issue federally backed savings bonds, Series A.

In the year 1941, to help finance World War II the Series E bond was first issued, and at that time they are titled ‘Defensive Bonds’. After the attack on Pearl Harbor, the money invested in these bonds went directly toward the war effort earning them the title of ‘War Savings Bonds’.

After the war ended, Americans encouraged purchasing savings bonds. Bonds offered a way for individuals and families to earn returns on their investments while enjoying the absolute guarantee of returns from the United States government.

What is a U.S. Savings Bond?

Features of U.S. Savings Bonds

In discussing the features of U.S. saving bonds, we can broadly divide them into the following:

Non – Marketable

These bonds were created to be non-marketable, which means that an investor can only buy them from the US government and cannot sell them to anyone else.

The bond cannot be transferred because it is a contract between the US government and the investor. The US savings bond’s value does not change due to this direct relationship.

If a bond is redeemed, the investor will receive their initial investment. Because the bond is registered with the government, any lost or destroyed savings bond certificate can be reprinted or replaced.

Purchase

The bonds can be purchased in penny increments for a minimum investment of $25 and a maximum investment of $10,000. In a calendar year, a person who has purchased a US savings bond cannot purchase more than $10,000 in face value of US savings bonds.

Savings bonds in the United States can only be acquired and redeemed electronically through the government’s TreasuryDirect website.

A Social Security Number (SSN), a checking or savings account, and an email address are required to open a TreasuryDirect account.

Interest payment

A zero-coupon bond is one that does not pay interest until it is redeemed or until it reaches its maturity date. Interest is compounded semi-annually and accrues every year for a total of 30 years.

After 30 years of holding a bond, the investor will no longer receive interest payments. If an investor buys a bond near the end of the month, he or she will receive the entire month’s interest.

Any interest due at redemption or maturity is deposited into the bondholder’s selected bank account electronically.

Tax consequences

Savings bond interest is tax-free in both state and federal jurisdictions. Federal taxes do apply, but only in the year the bond matures, is redeemed, or when the bond stops collecting interest after 30 years.

If the funds from the bond redemption are used to pay for higher education, the investor may be excluded from paying additional taxes.

Early redemption

A bond’s maturity period varies, although it usually lasts between 15 and 30 years. Before redeeming a savings bond, a bondholder must wait at least 12 months from the date of purchase, at which point they will get the face amount plus interest.

Additionally, investors who redeem the bonds during the first five years after purchase will be penalized by forfeiting the last three months’ interest. Although there is no penalty for redeeming a bond after 5 years of ownership.

How Does the U.S. Savings Bond Work?

The U.S. savings bond works by paying the investors interest on the bond. While the savings bond accrues interest over time, it doesn’t pay until it is redeemed and it can be only redeemed by the bondholder.

These bonds can be directly redeemed with the government or in the case of a paper bond with the government or a financial institution.

While Series EE and Series I bonds can be purchased in electronic form, Series I bonds can also be purchased in paper form with the IRS tax refund.

How To Redeem Savings Bonds

Investors can redeem their U.S. savings bonds after they are 12 months old. To redeem your bond that is in electronic form you need to log in to the TreasuryDirect website and follow the directions prescribed there.

Then the cash amount can be credited to your checking or savings account within the next 2 business days after the redemption date.

Where To Buy Savings Bonds

U.S. savings bonds can be bought only from the official website of TreasuryDirect after completing the prescribed procedure. Here it is important to note that no other party can sell these bonds so before buying U.S. savings bonds please verify its source.

Are Savings Bonds a Good Investment

Yes, a U.S. savings bond is a good option for investment because it is one of the safest ways to invest. Although the return is modest it is guaranteed and offers other benefits too such as tax exemption.

Also, you can defer paying federal taxes on the interest on bonds until you cash in the bond or until it matures. Additionally, tax benefits are available for eligible taxpayers when Series EE and Series I savings bonds are used for qualified education expenses.

These bonds can be used for financing education, supplementing retirement income, or for any other special events. So buying U.S. savings bonds can be a good investment.

FAQs

  1. What is a U.S. savings bond in simple terms?

In simple terms, U.S. savings bonds can be considered as debt securities bought by the people to pay for certain government programs. Here the investor is loaning money to the government with a guaranteed promise that he will earn back the face value of the bond with the interest on it.

  1. How much is a $100 savings bond worth?

To know how much is a $100 savings bond worth you need to calculate the value of a paper bond based on the series, denomination, and issue date entered.

  1. How long does it take for a $50 savings bond to mature?

For a $50 U.S. savings bond, it took 20 years to reach maturity, but in some cases, it can mature sooner which depends on its built-in interest rate.

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