Savings Bonds

Savings bonds are assets that are sold by the government. This means that when the government needs to borrow money from the public to finance expenditures, they issue bonds that pay interest. Government savings bonds are considered to be one of the safest assets to hold since it is unlikely that a government will default on its debt obligations.

Types

Paper savings bonds are no longer available at financial institutions as of January 1 2012. However, there are two different types of electronic savings bonds that can be purchased on the internet.

Electronic E.E Bonds

This is the most common type of savings bond. When purchasing an E.E Bond, there will be no premium or discount realized by the investor. This means that you will pay one hundred dollars for a one hundred dollar bond. The savings bond will also be worth the same amount when you redeem it at the maturity date. Investors are prohibited from purchasing more than ten thousand dollars worth of E.E. Bonds in a single calendar year. In addition, investors will be penalized if they redeem the bonds earlier than five years after the purchase date.

Series I Bonds

I bonds are very similar to Series E.E. Bonds. However, one important difference is that the interest rates of I Bonds will vary from that of E.E. Bonds. This is because the interest paid by these bonds is tied to the inflation rate. One attractive feature of the Series I bonds is that the interest rate you earn will always be greater than or equal to the inflation rate. This makes the Series I bonds a good long term investment. Investors will earn a base rate plus a varying rate that is recalculated twice a year as the inflation rates are determined.

Much like the Series E.E. Bonds, Series I Bonds are purchased at their par value. This means that an investor will pay one hundred dollars for a bond worth the same value. In addition, investors will also face a penalty if they redeem their bonds in the first five years after the purchase.

Paper E.E. Bonds

As previously mentioned, paper E.E. Bonds were discontinued as of January 1, 2012. However, they were previously available at a discount of half the face value. This means that a paper E.E. Bond that was worth one hundred dollars would be sold to an investor for fifty dollars. As interest accrued, the value of the bond increased, reaching face value at maturity. Much like the electronic E.E. Bonds, investors who redeemed their bonds within the first five years after purchasing it would face a penalty.

Paper E.E. Bonds were considered inconvenient because you could only purchase them in predetermined amounts. This means that if an investor wished to purchase a paper E.E. Bond worth two hundred and fifty dollars, they would be unable to do so.

Benefits

One of the greatest benefits of savings bonds is that they are low risk investments that earn a higher rate of interest than typical savings accounts. They also make practical gifts and are an excellent way to save for longer term investments such as education expenses.

In addition, tax advantages are also offered to investors who purchase savings bonds. You will not be required to pay state taxes on the amount earned from the savings bonds. Although federal taxes are not exempted, you may put off the payment until the bond matures.

In addition, investors who are enrolled in a post secondary institution may exclude the interest earned from their taxes. Upon maturity, the government will allow the cumulative amount of the interest earned to be deducted from an individual’s gross income. The only requirement is that they present proof of enrollment in a post secondary institution.

Conclusion

Due to the fact that savings bonds earn a higher rate of interest than a typical savings account, they are a sensible choice for long term investments. Although paper bonds have been phased out, investors may purchase either an electronic E.E. Bond or a Series I bond. Although these two assets are very similar, the latter has a varying rate of interest that is tied to inflation.