How Do Savings Bonds Work?
Savings bonds are a low-risk investment option offered by the government, primarily designed to encourage saving among individuals. These bonds are non-marketable securities, which means they cannot be bought and sold on secondary markets. Instead, they are issued and redeemed through the U.S. Department of the Treasury.
Types of Savings Bonds
- Series EE Bonds: These bonds are sold at face value and earn a fixed interest rate. They double in value after 20 years if held to maturity.
- Series I Bonds: These bonds offer a combination of a fixed rate and an inflation rate, protecting your investment from inflation.
How to Purchase
You can buy savings bonds online through the TreasuryDirect website or at financial institutions. They are available for as little as $25 when purchasing electronically.
Interest Earnings
Savings bonds earn interest over time, which compounds semiannually. You can redeem the bonds after a minimum holding period of one year. However, redeeming them within the first five years incurs a penalty of three months’ interest.
Tax Benefits
Interest earned on savings bonds is exempt from state and local taxes, and federal tax can be deferred until the bonds are cashed in or reach maturity. If used for qualified education expenses, you may be able to exclude interest from federal tax altogether.