Savings bonds from the U.S. Treasury do not trade on the open market so they are easily overlooked. But savings bonds are a safe investment small investors can use for long-term savings, and they might be useful for folks in higher tax brackets too: you can sock away some money you would like to shelter from taxation, which you are sure you won’t need for 5 years, and maybe not for 30 years; while you retain the option to use some of this money to pay for educational expenses later on, without being taxed on the interest.
Savings bonds can not go down. There are no transaction fees, they earn a modest return which can increase if inflation rises, and they pay interest which is completely invisible to taxation for up to 30 years. They are easy to purchase directly from the U.S. Treasury online.
There are two types: EE Savings Bonds and I Savings Bonds. The difference between them lies in the way interest is calculated and paid. EE bonds pay a fixed rate of return, currently 3.70%. Rates for new issues are adjusted each May 1 and November 1. The new rate will be effective for for the full life of all bonds issued in the six months following the adjustment. I bonds pay a variable rate throughout the life of the bond which is periodically adjusted for inflation. The initial rate for I bonds purchased now is 2.41%. The rate is adjusted each May 1 and November 1 based on the CPI. The important thing is that if inflation becomes serious in the future, I bonds purchased now could receive much more interest than EE bonds purchased now.
The two types of bonds have many common features. Both are accrual-type securities; interest is added to the bond monthly and paid when you cash it in. They both offer an interest-earning period of 30 years, and have early redemption penalties: forfeiture of 3 months interest if redeemed within 5 years of purchase. Interest earnings are exempt from State and local income taxes. Savings bonds are subject to federal income tax, but payment can be deferred until redemption. Federal income taxes will not be due if the proceeds are used to pay for educational expenses. There is a $25 minimum purchase and a $30,000 maximum purchase per individual per calendar year.
The savings bonds you purchase online are credited to your electronic account and you can check their value as interest accrues. To open an account with Treasury Direct, all you need is a social security number, a driver’s license number, a checking account, and an email address. You fill out a simple online application and choose a password, then they email you a Treasury Direct account number. About a five minute job if you have your numbers ready.
