Invest in Savings Bonds?

If you are looking for a safe investment to save for college or retirement, savings bonds may be the way to go. The return on savings bonds is relatively low compared to other forms of investment but because savings bonds are backed by the US government they are a pretty safe investment. Savings bonds are not short-term investments; but if you're just looking for a long-term investment, savings bonds offer many advantages.

1. REASONS TO INVEST IN SAVINGS BONDS

Savings bonds are fully backed by the US government. When you invest your money into savings bonds you can guarantee that your money will be there when the savings bond matures.

 

Savings bonds are exempt from state and local taxes. When you purchase a savings bond and cash them in you are free from paying any state or local taxes which means more money in your pocket.

Savings bonds are federal tax deferred until you cash them in. Another advantage of savings bonds over other forms of investment is that you do not pay any federal tax until you cash the savings bond in. While other forms of investments require you to pay taxes on the interest earned, you don't have to claim savings bond interest as income until you retire and you may be in a lower tax bracket.

Use the savings bonds for education and be free of all taxes. Sounds almost too good to be true, but it is. If you use the savings bonds to pay for your child's college tuition and you fall within the eligible income brackets you are free from paying any taxes.

These are some great reasons to invest in savings bonds but there are some drawbacks. The rate of return on savings bonds is relatively low, so if you are looking to make money quickly, look elsewhere. Relying solely on savings bonds for your retirement is not the smartest move but savings bonds are a great way to supplement your retirement pension or you 401K.

2. WHAT ARE THE DIFFERENT TYPES OF SAVINGS BONDS?

There are two different types of US Savings Bonds available at this time. They are Series EE and Series I. There isn't a whole lot of difference between the two types, but the most commonly purchased is the Series EE.

Series EE

1. Fixed rate of return. Currently 3.6 % through April 2007
2. Government backed. No matter what happens with the market, the value of your Series EE US Savings Bond will continue to gain interest until it hits final maturity.
3. Can be purchased in many denominations. $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000 for paper bonds. Electronic bonds can be purchased for any amount over $25
4. Paper bonds are purchased at 50% of face value or $50 for a $100 bond while electronic bonds are purchased for face value only. Another reason more people choose the Series EE US Savings bonds. If you purchase your savings bond through a bank you double your money when the savings bond reaches original maturity.
5. Can be used for education, retirement or given as gifts

Series I

1. Rate of return higher and fixed. Series I bonds have a fixed rate of return plus an inflation rate that changes in May and November of each year. Currently 4.52%.
2. Can be purchased in many denominations. $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000 for paper bonds. Electronic bonds can be purchased for any amount over $25
3. Both paper and electronic bonds are purchased for face value. Some people consider this a downfall for the Series I US Savings Bonds, but if you figure in the higher interest rate over time, Series I could bring greater rewards.
4. Can be used for education, retirement or given as gifts
5. The main reason for the popularity of the Series EE savings bond is the government backed guarantee. While the Series I has a higher rate of return, they do not carry the same guarantee so people tend to shy away from these savings bonds.

3. SAVINGS BOND MATURITY

When you invest in savings bonds you are planning for the future. Savings bonds take a set amount of time to reach face value. When the savings bond reaches face value it is said to have reached Original Maturity. Depending on the Series bond you purchased and when you purchased it will tell you when the bond matures.

Series EE and Series I Original Maturity

1. Jan 1980-Oct 1980 11 years
2. Nov 1980-Apr 1981 9 years
3. May 1981-Oct 1982 8 years
4. Nov 1982-Oct 1986 10 years
5. Nov 1986-Feb 1993 12 years
6. Mar 1993-Apr 1995 18 years
7. May 1995-present 17 years

The maturity times above are current but not guaranteed. The higher or lower the market rate, the faster or slower the savings bond will mature. At no time will it take more than twenty years for a savings bond to reach face value.

Final maturity

Both Series EE and Series I savings bonds will continue to gain in value after they have reached original value. The value gain stops at 30 years for both series. When the savings bond has reached its maximum value at 30 years it is said to have reached Final Maturity.

4. CASHING IN SAVINGS BONDS

Sooner or later you will want to cash in your savings bonds. Whether you cash them in early or wait until the savings bond has reached final maturity is completely up to you. You need to wait at least twelve months before the savings bond is eligible to be cashed in but if you do cash in a savings bond before five years you will be charged three months interest penalty.

You can cash in a savings bond at any financial institution if the bond was issued in your name. If there was a trustee or guardian to whom the bond was issued to you will need to go to a Federal Reserve Bank or the Bureau of Public debt.

5. FIND TIPS FOR SMART INVESTMENT

If you want to start investing in savings bonds it is best to get advice from experts first. Finding a good website where you can get information on savings bond investment is essential if you want to be a smart investor. There are plenty of investment websites for you to visit and compare the tips and strategies they offer.

The Consumer Action website offers general investing tips to help the new investor make smart decisions.

About.com has a few good articles covering US Savings Bonds investing.

Go right to the source. Visit the website for US Savings bonds to get the best information on investing.

Be a smart investor. Investing in savings bonds is a long term investment with relatively low return compared to other forms of investments. If you're looking to make millions from investing you should probably look elsewhere.

Use savings bonds as a retirement supplement. Savings bonds will give you a cushion to use with your retirement fund or your 401K.

Match your stock investments with savings bonds. Matching your stock investments can give you the peace of mind that even if the market crashes, you won't lose everything.

Purchase savings bonds for your children's education. Planning for your childrens' education is a big decision. Savings bonds offer the security that your money will be there and the freedom from taxes when used for education.

Be in it for the long haul. Everyone remembers getting savings bonds from their relatives as birthday or Christmas presents. You may also remember cashing them in for face value to buy that mountain bike or video game system. The only way to make money with savings bonds is to stick it out until they reach final maturity.