A U.S. savings bond is a government-issued bond available to American citizens to support federal spending while offering investors guaranteed, though modest, returns. These bonds are sold at a discount and feature an implied fixed rate of interest, to be matured over a predetermined period.
For instance, Series EE savings bonds are sold at 50% of their face value and mature to their full value after 20 years.
Key Highlights
- U.S. savings bonds help the government fund federal expenditures while providing a secure investment option for citizens.
- These bonds are sold at a discount and do not pay regular coupon interest, maturing to their full face value over time.
- Series EE bonds are sold at half their face value and mature in 20 years. Series I bonds adjust for inflation.
Understanding U.S. Savings Bonds
U.S. savings bonds are a type of government bond issued to gather funds from the public to support capital projects and other economic operations. When the government issues bonds, it essentially borrows money from the public with a promise to repay it at a future date. As compensation for the loan, bondholders receive interest payments.
U.S. savings bonds are attractive due to their exemption from state and local income taxes. They are also non-negotiable, meaning they cannot be transferred to other holders.
History of the U.S. Savings Bond
In 1935, amid the Great Depression, President Franklin D. Roosevelt signed legislation for the U.S. Department of the Treasury to issue federally backed savings bonds, Series A. Series E bonds, introduced in 1941 to finance World War II, were initially called Defensive Bonds, then War Savings Bonds after the Pearl Harbor attack. These bonds contributed financially to war efforts.
After World War II, Americans were encouraged to buy savings bonds, offering individuals and families a safe investment with guaranteed returns by the U.S. government.
Features of U.S. Savings Bonds
- Non-Marketable: These bonds cannot be sold to other investors and must be purchased directly from the U.S. government. They can’t fluctuate in value, ensuring investors get their original investment back upon redemption. Lost or damaged certificates can be reissued or replaced as they’re registered with the government.
- Purchase: Bonds can be bought in penny increments with a minimum investment of $25 and a maximum of $10,000 per year. Purchases and redemptions are done electronically via the TreasuryDirect website. Investors need a TreasuryDirect account, SSN, checking or savings account, and an email address.
- Interest Payment: U.S. savings bonds are zero-coupon bonds that pay interest only upon redemption or maturity. Interest compounds semi-annually for up to 30 years. After maturity, they cease to earn interest. Interest payments are made electronically to the holder’s bank account.
- Early Redemption: Bonds typically mature in 15 to 30 years. Redemption is possible after 12 months, including face value plus accrued interest. Bonds redeemed within the first five years forfeit the last three months’ interest as a penalty. No penalties apply for redemptions after five years.
- Tax Implications: Interest from these bonds is free from state and local taxes. Federal taxes apply only in the year of maturity, redemption, or after 30 years. Using redemption proceeds for higher education may lead to higher tax exemptions.
Types of U.S. Savings Bonds
There are currently two types of U.S. savings bonds available electronically:
- Series EE: These bonds, which replaced Series E bonds in 1980, are sold at face value and worth their full value upon redemption, featuring a fixed interest rate paid at maturity or redemption.
- Series I: Introduced in 1998, Series I bonds are also sold at face value but offer an interest rate adjusted for inflation. The bonds ensure the interest rate never dips below 0.00%, even during deflation.
- Series HH: No longer available for purchase since August 31, 2004, the Series HH bonds were 20-year, non-marketable savings bonds. Existing bonds continue to accrue interest until maturity.
Important Considerations
To buy or redeem a U.S. savings bond, investors must be U.S. citizens, official U.S. residents, or U.S. government employees (irrespective of citizenship).
U.S. savings bonds are among the safest investment types, backed by the federal government and thus risk-free. Although their interest rates are typically lower than stock market returns, they offer a stable and less volatile income source. They are ideal for saving future expenditures, especially since holding them longer increases their accrued interest. Bonds can’t be cashed until 12 months post-purchase, and the more they’re held, the more they grow.
Related Terms: government bond, zero-coupon bond, state income taxes.
