The Advantages of US Saving Bonds
Original post by Geri Terzo of Demand Media
Investing in U.S. savings bonds provides stability in an investment portfolio. The likelihood that the federal government defaults on these loans remains low, although the credit rating of U.S. debt was downgraded in 2011, and investors can reasonably expect to earn steady returns. Features attached to these bonds can be attractive and may allow investors certain tax advantages when investing for a specific purpose, such as education. There is flexibility tied to the financial and duration terms associated with U.S. savings bonds.
U.S. savings bonds can be purchased in increments of $25, which is lower than the minimum investment requirement for other Treasury securities. Investors can earn interest payments on these debt securities for up to three decades and are not locked in for the duration of the contract. Bondholders can opt to cash in and sell a bond after only 12 months; however, a penalty applies if investors redeem a contract before five years.
The federal government offers incentives to investors who purchase U.S. savings bonds for the purpose of funding a college education. Among the perks, investors become shielded from individual state income tax on these securities, according to the Retirement Planning Services website. Under certain conditions, investors could become exempt for federal taxes, too. To qualify, the bondholder or beneficiary must earn an income below a certain threshold. Any proceeds earned from U.S. savings bonds can be directed towards approved college expenses, including tuition.
Investors are not likely to experience surprises when it comes to the returns that a U.S. savings bond will generate. Beginning in May 2005, the US government attached a fixed interest rate for EE bonds, a type of U.S. savings bonds, according to Treasury Direct. The rate is locked in for at least the first 20 years of a contract, at which time the interest rate may be reviewed. Fixed rates may be assigned to newly issued U.S. savings bonds twice each year.
U.S. savings bonds can be used to save toward a major event, such as retirement or college, and these securities can also be given as gifts. According to PBS, the U.S. government is changing the way that government savings bonds can be purchased. Beginning in 2012, paper bonds can no longer be obtained, and instead investors must purchase these securities electronically over the Internet. The advantages associated with these securities, including low risk, stable returns and tax benefits, remain.
- Kiplinger; What the U.S. Debt Downgrade Means to Bond Investors; Jeffrey Kosnett; August 2011
- Wilmington Trust; Hedging Inflation With Series I Bonds; Eric K. Cheung
- Treasury Direct: New Rate Structure For Series EE Bonds
- Retirement Planning Services: Advantages and Disadvantages of U.S. Savings Bonds for College Savings
- PBS Nightly Business Report; How to Buy US Savings Bonds Online; July 2011
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.
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