Overview us Savings Bonds

With the stock market resembling a roller coaster, real estate markets fluctuating, and small investors hesitant to place their money anywhere but in a mattress, an old standby for investments is returning to the forefront: U.S. Savings Bonds.

For a small investor largely focused on a savings vehicle or security of principle, U.S. Savings Bonds are a hard investment instrument to beat. There are two U.S. Savings Bonds available to consumers over the counter at U.S. Commercial Banks: the classic EE Series U.S. Savings Bond and the more recent derivative, the I Series U.S. Savings Bond.

The EE Series U. S. Savings Bond
EE Series U.S. Savings Bonds are the traditional U.S. Savings Bond. come in two versions: Paper and Electronic EE Bonds.
Paper bonds are purchased for half of the face value of the bond and they are available at 8 different denominations. They are guaranteed to be worth the face value of the bond at 17 years after issue. They may be held as interest bearing investment instruments for 30 years. After 30 years, the bond no longer earns interest.

The Electronic EE Series U.S. Savings are available in any amount calculated to the penny over $25. They are purchased at face value and earn interest directly on that value. They earn interest monthly and that interest is compounded semiannually.

Both types of EE bond are exempt from state and local taxes. Federal tax can be deferred until you either redeem the bond or the thirty year anniversary of purchase, whichever comes first. In the event that the bonds are used for a qualified education expense, they may be federally tax-exempt at redemption.
The I Series U.S. Savings Bond

The Series I Savings Bond is a U.S. Treasury Inflation-Indexed Security available for purchase at U.S. Chartered Commercial Banks, or on line directly from the U.S. Treasury Department. They are sold at face value and grow with inflation-protection earning for up to 30 years. Investors can purchase them in denominations ranging from $50 or as much as $30,000 per year. They are backed by the full faith and credit of the United States Government, in essence by the future tax revenues collected by the U.S. Federal Government.

I Series U.S. Savings bonds have significant tax advantages over stocks, commercial paper, and real estate investing. Investors in I Series U.S. Savings bonds can defer Federal taxes on the interest earned for up to 30 years, and like the EE Series U.S. Savings Bond they are exempt from state and local income taxes.

I Series U.S. Savings Bonds increase in value monthly, while the interest earned is compounded semiannually. There are some liquidity limitations on I Series U.S. Savings Bonds. The minimum period prior to bond redemption is one year. The incentive to hold them is that due to semi-annual indexing, the I Series Bond avoids the primary risk to any type of bond investment: inflation risk. By indexing the bond to the inflation rate, the U.S. Government has created a vehicle that protects the investor’s principle during uncertain economic times. The inflation-indexed earnings, combined with tax deferral makes the I Series U.S. Savings Bond appealing to those investors who are 5 to 29 years from retirement. The federal-tax deferral can stave off taxes until someone enters the low income period, and presumably lower tax rate period, of retirement age. Depending on the state of residence, the state and local tax-exemption compounds the true value of the I Series U.S. Savings Bond to every investor.