If your investment strategy includes long-term bonds, you may want to consider U.S. savings bonds (typically referred to as Series EE Bonds).In addition to being patriotic, savings bonds might represent a smart investment in an ever-fluctuating economic environment. To make an informed decision, you need to compare savings bonds with other types of long-term bonds available to individual investors.
Types of Long-Term Bonds Available
There are three main types of bonds:Treasury bonds(T-Bonds) and savings bonds (which are issued by the federal government)municipal bonds(issued by cities, regions or states) and corporate bonds(issued by public or private companies).Long-term bonds refer to securities that take 12 years or more to mature to full value.
Savings Bond Risk
When it comes to risk, it’s hard to beat U.S. government-issued bonds. Both Treasury bondsand savings bonds are backed by the full faith and credit of the United States government. Municipal bonds come next in line, as state and local governments rarely go bankrupt(although Detroit’s bankruptcy in 2013 might give some investors pause).
Municipal bonds are available at threebond-rating levels: AAA, AA or A, with AAA being the least risky and A being the riskiest. Corporate bonds are the riskiest of all bond types because a company, not a government issue them. These bonds are also rated AAA, AA or A, just like municipal bonds.
Expected Yield
Yield is the interest rate paid by the bond. In November 2021 (the most recent available data), composite bond-yield rates for 20-year corporate A-rated bonds hovered near 3%,municipal A-rated 20-year bonds fluctuated from 1.22% to 1.06%,and 20-year Treasury bonds yielded anywhere from 1.85% to 2.08%.
This is where savings bonds shine. Thanks to a little-known government guarantee, Series EE savings bonds held for 20 years are worth twice the amount paid for them. That’s a yield of 3.53%, which usually beats everything but the riskiest corporate bonds. For any period less than 20 years, savings bonds pay only the base rate (currently 0.1%), which they continue to pay for up to 30 years.
Liquidity
When it comes to liquidity, savings bonds stumble compared to other options. It is important to remember that you only get that government guarantee of doubling your money if you hold the savings bond for a full 20 years. In addition, you can’t redeem a savings bond during the first year you own and, if you redeem it within the first five years, you will lose the last three months’ interest.Finally, savings bonds can’t be traded or sold between individuals (no secondary market) and must be redeemed through the government itself. By comparison, Treasury bonds, municipal bonds, and corporate bonds are much more liquid; all three types can be traded on a secondary market before maturity. The rules for each vary as a group, but all are substantially easier to liquidate versus savings bonds.
Inflation Protection
Series EE savings bonds have no inflation protection. The second type of savings bond called the Series I bond earns the fixed-interest base rate plus an inflation rate, which is calculated twice a year. It is not, however, eligible for the 20-year “doubling” guarantee. Although regular Treasury bonds have no inflation protection, Treasury Inflation-Protected Securities (TIPS)do. TIPS pay a lower interest rate than regular Treasury bonds, so when you buy them, you risk the possibility that inflation will not rise more than the difference in yield between regular Treasury and TIPS. Regular corporate bonds do not have inflation protection, but inflation-linked corporate bondssuch as TIPS do.
Investor Limits
Savings bonds come in denominations ranging from $25 to $10,000. You can only invest a maximum of $10,000 per year (per taxpayer) in savings bonds, making them the most constrained of bond investments.Treasury bonds are available starting at $100. There are two processes (besides the secondary market) for buying them:noncompetitive bids and competitive bids. Noncompetitive bids are limited to $5 million. Competitive bids by an individual cannot exceed 35% of the total offering. Municipal bonds typically come in a minimum denomination of $5,000, and there is no maximum amount you can invest, as long as bonds are available. Corporate bonds typically require a minimum investment of $1,000, with no maximum investment limit.
Taxes
Savings bonds are subject to federal income taxes but not state and local. If your Series EE savings bonds are used to pay higher-education costs, you can do so tax-free, provided you earn no more than the limits.No matter what, you have the option to delay paying federal taxes on Series EE bonds until maturity at 20 years.Municipal bonds are not subject to federal taxes, and in some cases, state and local taxes are also excluded. Generally speaking, interest on corporate bonds is taxable.
All data updated Dec. 28, 2021.
FAQs
It is important to remember that you only get that government guarantee of doubling your money if you hold the savings bond for a full 20 years. In addition, you can't redeem a savings bond during the first year you own and, if you redeem it within the first five years, you will lose the last three months' interest.
How much is a $50 savings bond worth after 20 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
May 7, 2024
Series EE bonds earn interest for 30 years. This long life lets investors use savings bonds for truly long term goals like education and retirement.
How long does it take for a $50 savings bond to mature? ›
They're available to be cashed in after a single year, though there's a penalty for cashing them in within the first five years. Otherwise, you can keep savings bonds until they fully mature, which is generally 30 years.
How do I avoid paying taxes on U.S. savings bonds? ›
You can report the interest each year you earn it or when you cash the bond. You will report it on Schedule B of your 1040. You can avoid these taxes by using the money for qualified higher education expenses.
Do savings bonds double every 10 years? ›
EE bonds you buy now have a fixed interest rate that you know when you buy the bond. That rate remains the same for at least the first 20 years. It may change after that for the last 10 of its 30 years. We guarantee that the value of your new EE bond at 20 years will be double what you paid for it.
What is the final maturity of a $100 savings bond? ›
U.S. Savings Bonds mature after 20 or 30 years, depending on the type of bond: Series EE bonds mature after 20 years. They are sold at half their face value and are worth their full value at maturity. Series I bonds are sold at face value and mature after 30 years.
What is better, a CD or savings bond? ›
With fixed returns and the safety of FDIC insurance, CDs can be an excellent choice the short term. Bonds provide higher yields and offer more flexibility, making them suitable for investors with medium to long-term time horizons.
Can a U.S. savings bond lose value? ›
If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.
When should I cash in my EE savings bonds? ›
You can cash in (redeem) your EE bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
Bottom line. I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.
Are EE bonds taxable? ›
Key Takeaways. Interest from EE U.S. savings bonds is taxed at the federal level but not at the state or local levels for income. The interest that savings bonds earn is the amount that a bond can be redeemed for above its face value or original purchase price.
Why is my savings bond worth so little? ›
There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value.
Does the IRS tax interest on US savings bonds? ›
16. How are savings bonds taxed? Savings bond interest is exempt from state and local income tax. Savings bond interest is subject to federal income tax; however, taxation can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first.
Will I get a 1099 for cashing in savings bonds? ›
If you cash a paper savings bond at a local bank, that bank is responsible for giving you a 1099. If you cash a paper savings bond by mailing it to Treasury Retail Securities Services, we mail you a 1099 by January 31 of the following year. (You can call us for a duplicate statement, if needed, beginning February 15.)
How do I redeem a savings bond without paying taxes? ›
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent. Only certain qualified higher education costs are covered, including: Tuition.
Do EE bonds double in value after 20 years? ›
EE bonds earn a fixed rate of interest, but, regardless of the rate, they are guaranteed to double in value if you hold them 20 years.
Do savings bonds expire after 30 years? ›
Series EE savings bonds are a low-risk way to save money. They earn interest regularly for 30 years (or until you cash them if you do that before 30 years). For EE bonds you buy now, we guarantee that the bond will double in value in 20 years, even if we have to add money at 20 years to make that happen.
How often does a 20 year bond pay interest? ›
Bonds and Notes
Bonds are long-term securities that mature in 20 or 30 years. Notes are relatively short or medium-term securities that mature in 2, 3, 5, 7, or 10 years. Both bonds and notes pay interest every six months.
Why is my $100 savings bond only worth $50? ›
There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value.
