U.S. savings bonds are an option to consider when saving for financial goals that are five or more years away. Buying a savings bond means that you’re lending the U.S. government your money and, in exchange, the government will pay you back with interest. Savings bonds can be bought for as little as $25 and are considered extremely low-risk because they are fully backed by the U.S. government. You can usually purchase and redeem savings bonds at your bank or directly from the government’s website TreasuryDirect.
There are essentially two types of bonds:
Series EE Bonds—Also known as “Patriot Bonds,” the EE bond is the standard savings bond. These bonds earn a fixed rate of interest, which allows you to easily calculate what your bonds are worth at any given time.
Series I Bonds—I bonds are similar to EE bonds, but the interest rate is indexed to the inflation rate—the “I” stands for “inflation”—which means that your "I" bond is designed to keep pace with, or beat inflation.
Important to know: If you redeem a government bond any time during the first five years, you’ll forfeit the three most-recent months’ interest. Redeeming a bond any time after five years will not incur a penalty. You must also wait at least one year before redeeming a bond at all.
What do savings bonds have to offer?
U.S. savings bonds are a safe place to save money. The interest rates can be higher than a typical savings account, but you can’t access the money for at least one year and, you’ll give up 3 months worth of interest if you redeem a bond in less than 5 years.
Tax Benefits—Unlike interest earned through traditional savings accounts and certificates of deposits (where the interest earned is fully taxable as ordinary income each year), savings bonds are exempt from state and local taxes.
To find out more about government savings options, visit Treasury Direct.
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