No matter where you are in life, there’s an investment option to fit your investment goals, risk tolerance, and time horizon. U.S. Savings Bonds tend to be a good fit for those looking for a lower-risk investment option, either because they’re just beginning to invest, are closer to retirement age or simply would rather take on less risk. Here’s an overview of how U.S. Savings Bonds work, how to purchase them, and some tax considerations to keep in mind.

What are U.S. Savings Bonds and how do they work?

Savings bonds are securities issued by the U.S. Treasury Department. When you purchase a savings bond, you lend money to the U.S. government, and as the bond matures, you earn interest. Savings bonds are considered a low-risk, low-return investment option, and they are backed by the “full faith and credit” of the U.S. government.

You may choose from two different savings bonds options: Series EE or Series I Bonds. Series EE Bonds are more common. They are purchased at a fixed interest rate and take 20 years to mature. Series I Bonds are purchased at an interest rate calculated by current fixed interest rates as well as the rate of inflation. Series I Bonds take 30 years to mature. If inflation is expected to be high for the next 30 years, investors tend to gravitate towards Series I Bonds.

Where can I purchase savings bonds?

You can purchase savings bonds electronically through TreasuryDirect, a secure web-based system which allows investors to establish accounts to purchase, hold, and conduct transactions online. This applies to Series EE and I Savings Bonds, Treasury Bills, Notes, and Treasury Inflation-Protected Securities (TIPS).

You can purchase U.S. Savings Bonds in any denomination from $25 to $10,000. Keep in mind, there’s a $10,000 annual limit per savings bond series per person.

How do I redeem a savings bond?

You can cash your electronic savings bond on the U.S. Treasury’s website. While paper savings bonds are no longer available for purchase as of January 2012, existing paper savings bonds issued before then can be redeemed at a bank or credit union.

If you’re ready to cash in your U.S. Savings Bond, here are a few things to keep in mind:

  • Savings bonds purchased less than a year ago cannot be cashed.
  • Savings bonds redeemed before the five-year mark will incur a penalty of three months’ interest.
  • Bonds no longer earning interest (generally after 30 years) should be cashed in.
  • The longer you wait to redeem your savings bond, the more it will be worth. Especially keep this in mind once you surpass the 20-year mark and are earning a higher interest rate.

What is the tax implication of cashing a savings bond?

Unless you elected to pay taxes on the interest annually, you must pay federal income tax on the bonds at maturity, even if you do not cash them in. There’s no state or local income tax on U.S. Savings Bonds.

Keep in mind, cashing several bonds or one large bond in the same year could result in enough interest income to put you in a higher tax bracket or push seniors into paying more for Medicare Part B. Also, for bonds purchased after 1989 in parents’ names, there may be some tax advantages if the proceeds are used to pay college costs, depending on total family income and other requirements. Always consult your tax advisor for more detail.

When it comes to investing, there are many options. While some investors – especially those with a longer time horizon – prefer a more aggressive, high-risk and high-return approach, those with a shorter time horizon may find options like savings bonds more suitable.

Next steps:

  1. To find the right investment approach for your situation, contact an investment specialist.
  2. Check out our other Retirement & Investing content, including this video on the difference between stocks and bonds.
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