Why People Invest in US Savings Bonds
Originally started as a way for the government to fund costs associated with waging World War I, US Savings Bonds are still being issued today. There are 55 million Americans that own savings bonds. While most people buy savings bonds for their safety and relative simplicity, there are some important facts to understand before putting your money to work in savings bonds.
Because US savings bonds are issued by the federal government, the chances of a default are close to zero. The Federal Government repays savings bonds with revenue derived from taxes and the issuance of new bonds.
Ease of Access
You can invest in savings bonds with as little as $25. They can be purchased directly from many local banks (until 2012 when the US Treasury will stop issuing paper bonds and go totally online) or electronically at www.treasurydirect.gov.
Because savings bonds are issued by the federal government, the interest earned on US savings bonds are exempt from state and local income taxes. They are not however exempt from federal tax.
Another great feature of savings bonds is that you can defer paying federal taxes on the interest. Unlike even other bonds issued the US Treasury, with savings bonds you have the choice to defer taxes on your interest income until you cash in the bond. In a way you could say the benefits are the same as putting money in an IRA or a 401K, except you do not have to wait until you’re in your sixties to access the money. Additionally, If you use the savings bonds to pay for qualifying education expenses, state and local taxes may also be avoided, making the interest income on US Savings Bonds entirely tax free.
For more on savings bonds and taxes go here.
Because you buy a US Savings Bond directly from the US Treasury, you do not have to pay a commission or markup. While this is good for the buyer of savings bonds, financial brokers who earn their living from commissions and markups don’t have the opportunity to make their fees with savings bonds.
Unlike other types of bonds, you cannot sell the bond to someone else. Put another way, you can only cash in or redeem a savings bond with the US Treasury. If you want to cash-in a savings bond, you must wait 6 to 12 months after buying it, depending on the type of bond. There is also a major penalty for cashing in a savings bond prior to holding it for five years, of 3 months worth of interest.
Savings bonds are also not meant for investing large amounts of money. The maximum amount that you can invest is $10,000 (face value) for each type of savings bond, in any calendar year.