1. Money
Send to a Friend via Email

Savings Bonds - Overview of How US Savings Bonds Work

Advantages and Disadvantages of Savings Bonds

By

Savings bonds used to be a major offering at banks and credit unions. Nowadays, these institutions still redeem bonds, but they don't sell them anymore.

What are savings bonds all about? This page takes you through the basics, how they’re used, and how you can get detailed information about savings bonds that you own.

Part 1: Overview of Savings Bonds
Part 2: Pitfalls and Risks of Savings Bonds
Part 3: How to Buy Savings Bonds

What are Savings Bonds?

Savings bonds are securities issued by the US Treasury Department. They provide funding dollars for the US Government. In return for using your money, the government pays you interest. This discussion covers series EE and I savings bonds.

How Much Interest do I Earn on Savings Bonds?

Interest rates depend on general economic conditions. As interest rates in general rise, so do the interest rates paid on savings bonds. If you want exact numbers, you can visit the Federal Reserve's website for current and historical rates. In general, you’ll find that rates are fairly competitive for a safe investment – and you may get some tax benefits to help enhance your returns.

What Tax Benefits do Savings Bonds Offer?

Depending on your situation, you may get some nice benefits from using savings bonds. For starters, savings bonds don’t pay periodic interest subject to income tax. Instead, they increase in value over the years. This means you can delay claiming the interest income until you redeem the bonds (or until they mature, which is typically 30 years after issue). If you don’t want to claim income now, but you wouldn’t mind claiming it later, savings bonds can help.

Another tax benefit is the Educational Tax Exclusion (or Education Savings Bond Program). If you cash in your bonds and use them for qualified higher education expenses, you may be able to exclude that income from taxes. Be sure to follow the rules regarding the type of expenses, income limits, and more. You can find the details at the Savings Bond for Education site.

Finally, savings bond interest income is exempt from state and local income taxes. This means you can spend more of what you earn. Depending on your state, this can be a big deal or almost insignificant.

©2014 About.com. All rights reserved.