What are Savings Bonds—How to Know Which Are the Best
Introduction
If you own a savings account with any bank in the United States, you probably do so for the safety that it ensures for your money. All savings accounts are insured by the Federal Deposit Insurance Corporation – FDIC, which provides a maximum insurance of $100,000 per depositor. Yes, there is no safer place for your money than a savings account, but the guaranteed fact is that savings accounts also offer the most pitiful interest rate when compared to all other investment options.
Not too many people are adventurous enough to go into the stock market with their money and would prefer to play safe, and understandably so. For people looking for an alternative to savings bank accounts, that offers an equivalent or even enhanced amount of safety with a better rate of interest, savings bonds are the best deal.
Savings Bonds have Direct Backing of State Government:
A savings bond is not backed by the FDIC, but rather, it has the direct backing of the United States Government! So you can rest assured that as long as the federal government is going to exist, your money is as safe as possible, as it becomes the obligation of the U.S. Government to repay your money – principal and interest.
Another factor that will make any investor happy is the fact that savings bonds are exempt from state and local taxes, as they are issued by the federal government. For those looking for some tax relief, savings bonds can lend a helping hand unlike savings accounts, the interest that accrues on a savings bond is not taxable; it is tax-deferred until time of redeeming the bond.
Types of Bonds
Series EE Bonds and Series I Bonds are the two types of savings bonds that are offered by the treasury. Series EE bonds can either be electronic or paper based. Electronic EE bonds can be directly purchased from. An electronic EE bond is sold at the face value, which means that if you buy a $50 bond for $50, the bond is worth the full amount when you redeem it. This is not so in the case of a paper EE bond, which is sold at half its value, that is, you would have to shell out $50 to purchase a $25 bond. Plus, a paper EE bond reaches the face value only when it matures as it increases in value over time with accruing interest. On both these EE bonds, the maximum limit that can be purchased in a year is $5000.
Series I Bonds are quite similar to their counterparts the EE Bonds, but with a crucial difference. The “I” in the name denotes inflation, and they are named so because the interest rate in the case of these bonds is indexed to the inflation rate. A fixed rate is set initially for the bond which continues till maturity, plus an inflation rate on top of that is determined bi-annually. Series I Bonds can also be bought as electronic or paper bonds and both forms are sold at face value unlike EE bonds. They also have a maximum purchase limit of $5000 per calendar year.
Both types of Savings Bonds are a safe bet, but for a depositor looking for the better of the two, I Bonds have performed better than EE Bonds over the long term due to the rising rates of inflation.
Reference
https://banking.about.com/od/investments/a/SavingsBonds.htm
