TaxProfessionals.com
Posted by Pat Raskob

What Are Savings Bonds & How Do They Work?

What Are Savings Bonds & How Do They Work?

Savings bonds are a popular means of savings for conservative investors because they have the full confidence and credit of the US government. With savings bonds, you receive a fixed interest rate on the principal paid by the receipt.

However, like other savings vehicles, savings bonds have their advantages and disadvantages. This piece covers what you need to know about saving bonds to help you determine if they are right for you, what types are available, and how to buy them.


What are savings bonds?

Like municipal bonds, savings bonds are a way for the government to raise money for debt, promising to repay principal and interest from bondholders later. The government supports the redemption of bonds, which makes them reduced for investors.

Savings bonds are issued for face values up to $50 and purchase values up to $25.


How do savings bonds work?

Savings bonds work by paying a fixed rate of interest on the principal paid on the collateral. Collateral repayment for twice the amount paid could be guaranteed depending on the type of savings bonds purchased.

There are three essential features of savings bonds that you should know before you buy them:

  • Savings bonds are generally tax-deferred: interest earned on a savings bond (except for the Series HH bond) does not have to be reported as income, although taxpayers can report it on an individual basis year if they wish. You can only report the accrued interest when the savings bond is repaid, at which time you will receive a 1099-INT tax return. However, the earnings must be reported if the savings bond is not redeemed by the 30th year.

  • Savings Bonds may be tax-exempt: Series I and Series EE Savings Bonds are not subject to state or local taxes. Also, if the savings bonds are used for certain qualifying higher education expenses, and you are at least 24 years of age on the first day of the month in which the bonds were purchased, the accrued interest may be exempt from federal tax.

  • Survivorship: When buying a savings bond, the bondholder can designate a survivor who will have the option of buying back the bond or reissuing it on the bondholder's death. The bond will usually be part of the deceased's estate where no survivor is named or where the survivor dies before the bondholder.


What types of savings bonds are there?

Once you have made up your mind to buy a savings bond, you have two types of choices: Series EE and Series I.

  • Series EE Savings Bonds: Sold electronically only through treasurydirect.gov, Series EE Bonds has a fixed rate of return. If they are not redeemed in the 20th year, bondholders will receive double the bond's purchase price.

  • Series I Savings Bonds: Unlike Series EE Bonds, Series I Bonds have a fixed interest rate and an inflation rate and are not guaranteed to double in value until year 20. Interest is calculated twice a year based on the consumer price index for all urban consumers (CPI-U). With this savings bond, the bond changes every six months. However, it has a fixed rate component that remains fixed throughout the life of the bond, serving as a protective floor against negative inflation.

Some people may have what is called an HH bond, purchased before September 2004. In time past, these were issued in exchange for Series E bonds which were no longer offered, just like Series EE HH bonds are no longer new purchases, but those who still have them can withdraw them at the local bank.

Although the old Series E bonds have passed their last interest maturity, some old HH bonds may still earn interest, including the latest issues of 1998, which will earn interest for a total of 20 years. If you think you have any of these titles but have lost your certificate, you can use the tax office's Form 1048 to request it.


Where to buy savings bonds?

Depending on the type of bond you want, there may be several places where you can buy savings bonds, at your bank, through your tax return, and Treasurydirect.gov.

However, savings bonds are not traded, as there is no secondary market for them.

  • How to buy Series EE Bonds: These bonds are sold electronically (EE paper bonds are no longer distributed) and can only be purchased online. Buyers can buy EE bonds worth up to $10,000 per year.

  • How to Buy Series I Bonds: Series I bonds can be purchased on paper or electronically. In addition to purchasing them online, they can be purchased from certain banks, and taxpayers can choose to use the tax refund to purchase them using IRS Form 8888. You can purchase up to $10,000 worth of money social security number tickets per year and more to $5,000 in paper vouchers through a tax refund.


How are savings bonds reimbursed?

How you redeem your savings bond receipt depends on whether you have a paper or electronic voucher. In several cases, you can simply take a voucher to your local bank to collect.

However, electronic vouchers are usually redeemed online on the Treasury website. Please note that the amount you capitalize on can be an issue for e-vouchers, as minimum redemption amounts and minimum remaining balances are required for partial redemptions.

When you capitalize on a savings bond, it's best to redeem it at the start of the month. You will continue to receive credit throughout the month.

Please note that neither EE nor I can be exchanged within the first 12 months of purchase. If they are cashed within five years of issue, the last three months of interest are retained. For example, if you reduce an EE or I bond to 48 months after it is issued, you will only receive 45 months of interest.

If you have an old war bond, it may still be worth it today. The worth of your bond will depend on the date of issue and the type of series. You can also redeem these bonds from a bank or credit union.


Can Savings Bonds be considered as Good Investment?

Like all investment or savings vehicles, there are advantages and disadvantages associated with savings bonds:


Advantages and disadvantages of savings bonds:

 Advantages

  • It can be a good way for young people to learn how to invest 

  • In general, a safe investment because it offers capital protection


Disadvantages

  • In general, they do not produce significant returns.

  • They tend to have lower interest rates.

Without analyzing a person's entire portfolio, it's impossible to tell if savings bonds are a good investment. They are a safe investment, but their low-interest rate may not be what all investors need.

The question is whether what you get in terms of the rate of return keeps up with the rate of inflation. There are different types of people for whom savings bonds can be created.


Conclusion

When you buy a US savings bond, you borrow money from the federal government, which will pay you back in full, plus some additional interest. Bonds are generally considered low risk and while they don't pay too much interest, they can get some tax benefits as well.


FOR MORE INFORMATION ON HOW PAT RASKOB CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

Pat Raskob
Contact Member