Chances are most of you own or have at least seen a United States savings bond. Perhaps your Grandma gave you one for college graduation. Maybe your parents used them to help finance your schooling. Maybe you got one from a great aunt or uncle as a Christmas gift. Possibly you have even purchased them yourself.
Since there is a pretty good chance that some of you may have received a savings bond at one time or another, I want to talk about what the heck they are and why you might want to purchase or redeem them.
What are U.S. savings bonds?
For those who may not have encountered savings bonds, Treasury Direct defines them as non-marketable securities that are designed to be less susceptible to market conditions. They are offered in small denominations that an individual investor can own, are redeemable after a short period and pay interest for a number of years (ranging between 10 – 30 years depending on the type). They are registered in the owners name.
Savings bonds are taxable at the federal level, but not at the state and local level.
The savings bond program has played a part in helping to fund US debt and US programs throughout the last century. In case you aren’t aware, here is a brief history of the US savings bond program.
A brief history of savings bonds.
United States savings bonds are steeped in history. They have helped finance the US debt since 1939 when the first small savings bonds (series A – D aka the Baby Bonds) were issued.
During WWII, Greatest Generation members considered it patriotic to own Series E bonds. From then on, many citizens have acted as promoters to get people to buy bonds.
We’ve had multiple series issued throughout the years since 1939, usually in paper form, many through payroll deduction, but many others sold through banks and financial institutions directly to citizens and residents.
The ones I am most familiar with are Series EE bonds, Series H bonds and Series I bonds, but there were others. Not all of them still earn interest.
You can check them all out on this Treasury Direct time line.
Which kinds of savings bonds still earn interest?
Series HH bonds.
These were issued from 1980 through 2004 and had a life of 20 years. By August of 2014 all of these will stop earning interest. The interest on these is paid out to you every time it is earned and you pay taxes on the interest as you earn it. Since some series EE bonds were exchanged into Series HH bonds and the accumulated interest on the EE bonds was put into the principal on the HH bonds, you may actually still owe taxes on any interest earned before the exchange.
They were sold at face value. You can redeem the bond for it’s face value, but be careful if your bond is still earning interest. You want to redeem it right after the interest is paid because if you hold it longer you won’t get interest on a partial period. These cannot be redeemed at your local bank, as most types of savings bonds are. Instead you have to sign and send it in to the Fed.
Series EE bonds.
Series EE bonds are still being issued today, but only electronically. However, just because new ones are being issued doesn’t mean the EE you have is still earning interest.
Savings bonds issued under the EE series have been around since 1980. Since they only ‘live’ for a maximum of 30 years, some of them no longer earn interest. Just to make life more interesting, EE bonds issued on different dates have different interest rates. Some earn a fixed rate as of the date they are issued, others have a variable rate and they had differing original maturity terms. Even if your bond no longer earns interest, you can still redeem it, usually at your local bank.
Earlier bonds were sold at ½ their face value (a $50 bond was purchased for $25) and as time went on, the interest added to the principal and eventually they were all guaranteed to be worth the face value printed on the bond.
If you want to buy a bond today (and I’m not sure that would be a really great idea in 2013 due to the low interest rates),you have to do so electronically and you will pay face value and earn a fixed rate. There is a different rate for NEWLY ISSUED bonds every 6 months, but if you buy one today, the rate that is in effect now is the rate you continue to get. You have to keep it for 12 months, but then can redeem it. However, if you redeem prior to 5 years, you lose the last 3 months of interest. The longer you hold the bond, the more it is worth. Like the HH bonds, be careful about when you redeem your bond so you don’t lose interest for a partial period.
Back in the late 1980’s and 1990’s my spouse did a payroll savings plan to buy a bond a payday, alternating ownership every other month to each of our two sons. So one month, a bond was issued in the name of the oldest and the next month, in the name of the youngest. We kept the bonds in our safety deposit box and gave them to the boys about 10 years after they graduated. It was a relatively painless way to help out the kids.
Series I bonds.
Series I bonds have been around since September 1998. They have a funky rate that is a combination of a fixed rate and an adjustment for inflation. They are now, and always have been purchased at the face value. The fixed rate has varied over the years, as it did with the EE bonds.
If you want to buy an I bond today, you can do so electronically, or you can get a paper bond by making the purchase with your federal income tax refund. You will pay face value and get that funky interest rate mentioned above. Like the EE bond, you have to keep the I bond for 12 months, but then can redeem it (usually at your local bank). However if you redeem prior to 5 years, you lose 3 months worth of interest. Also like the series EE and HH bonds, be careful when you redeem. Do so shortly after interest is paid so you don’t lose any from a partial period.
I bought 6 I bonds in the early 2000’s as a gift for one of our sons. I’ll tell that story later in this post.
Which kinds of savings bonds might you have that do not earn interest now?
Series H bonds.
H bonds were last issued in 1979 and have all matured. If you own an H bond, you should probably redeem it and put the money somewhere that pays.
My Aunt used series H bonds to fund her retirement income, as they pay out as the interest is earned – like the HH bonds that followed.
Series E bonds.
These were issued from 1941 through 1980. The last of these stopped earning interest in 2010. You can still redeem any series E bonds you might hold, typically at your local bank.
These are the famous war bonds from WWII.
My folks bought these for my brother and I and for my children. When Mom, the last to die, passed on, we found stacks of them in her safety deposit box, most towards the end of their maturities. She had set up beneficiaries on them using the Pay on Death capability, which meant that we didn’t have to take them through court to obtain ownership. If your deceased relative owned savings bonds, check out instructions for Death of a bond owner.
Others no longer earning interest can be found on Treasury Direct.
How can you know what your bond is worth?
With all the different series and differences within each series, how can you know what your bond is worth? Luckily (since some of the calculations are not so easy), Uncle Sam has given us a calculator to use.
Should you cash in your savings bonds?
I can give you a resounding YES, if your bonds no longer pay interest and you will re-invest in something that does. However, if you want to save and don’t trust yourself to not spend the money, maybe you should just leave them alone for now. You probably owe income taxes on the interest on series E, EE and I bonds if they have fully matured, even if you haven’t redeemed them.
Otherwise, I say, it depends. Check the worth of the bond, figure out what kind of interest rate you are getting and decide from there.
You can exchange your paper bonds into electronic format to make them easier to track, again on the Treasury Direct site.
Why would you want to buy a savings bond?
With today’s low interest rates, why would anyone buy a bond that pays a fixed low rate, can’t be redeemed for 12 months and has to be kept for 5 years to avoid losing interest?
Well, in my opinion, most people wouldn’t want to buy a new bond unless:
- You want a ‘safe’ place to stash cash for the long term.
U.S. Savings bonds are as safe as any security issued by the US government. Granted, this isn’t as safe as it used to be, but still may be one of the safest places to maintain your principal while earning at least a little bit of money.
- You want to use the money for education someday.
If the bond is used to pay for education, you may get tax benefits, although, as usual, the IRS puts conditions on who can benefit.
- You want to give a gift now to someone, but not let that someone have access to the money.
Let’s say you want your kid to start saving early for retirement. You tried matching their summer job earnings and having them open an IRA, only to find that they paid the penalty and taxes and cashed the IRA out a couple of years later.
With a bond, even today when they are electronic, you can buy it now but gift it later. Until the recipient opens a Treasury Direct account and supplies an email id, they don’t know you have made the gift.
This could function as a way to move money from your estate so that it isn’t considered for estate taxes, yet not have the money available to the person to whom you are giving it. However, you can only buy $10,000 worth of a bond in any one year.
I promised a story about my retirement gift to my son in above paragraphs and here it is. When my kids started earning money, I wanted to encourage them to start retirement savings early. I matched some of their earnings and had them set up an IRA account. One of my sons kept his IRA account intact and benefited from the time value of savings. With him, I continued to give a check for several years after college for him to use as a match for his earnings. That way, he could contribute the money he earned to his retirement, yet still have access to part of the amount via my gift.
The other son did indeed raid his IRA in his twenties. So, to match what I did for the son noted above, I bought I bonds and kept them in my safety deposit box for 10 years. Since he may not be earning optimal interest with an I bond today, I finally gave him possession last week.
What has your experience been with savings bonds?
This post has been written by Marie from FamilyMoneyValues.com. Be sure to visit her site if you’ve enjoyed this post.
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