You can invest in two types of savings bonds with a savings bond plan:
Both types of savings bonds are sold at face value and accrue interest monthly. Interest compounds semi-annually until the bonds reach their 30-year maturity date or you cash them out—whichever happens first. You receive the interest that accrued when you redeem the bond. You can cash out both types of savings bonds after 12 months, but if you do so within the first five years, you’ll forfeit three months of interest. For example, if you cash out savings bonds after 24 months, you’ll only get 21 months’ worth of interest.
How To Enroll in a Savings Bond Plan
To enroll in a savings bond plan, you need to set up a TreasuryDirect account. Once you’ve created the account, you can set up a payroll savings plan. You’ll choose the type of savings bond you want to invest in and the dollar amount you want to buy. You then ask your employer to make periodic transfers from your paycheck through direct deposit. You’ll enter “TREASURYDIRECT” as the receiving bank’s name and provide the appropriate account and routing numbers for your TreasuryDirect account. The money you deposit is used to buy a non-interest-accruing security called a “Payroll Certificate of Indebtedness” (C of I) that will fund your savings bond purchases. Once you’ve accumulated enough money in your C of I to buy a savings bond, the TreasuryDirect system will automatically make the purchase for you. For example, if you wanted to buy $25 I bonds and contribute $12.50 per paycheck every other week, TreasuryDirect would automatically buy you one $25 bond using your C of I after your first two paychecks, and then another $25 bond every four weeks after that. You can purchase up to $10,000 per calendar year of Series I and Series EE bonds each, or a total of $20,000 annually.
Pros and Cons of a Savings Bond Plan
Pros Explained
Automatic savings: Setting up a savings bond plan is a good way to save and invest money automatically. You don’t have to think about buying bonds on a regular basis or saving up until you have enough for a large bond. Once you set the plan up, you can forget it. Tax advantages: Using a savings bond plan comes with several tax advantages. You won’t pay state or local income taxes on the interest you earn, and federal taxes on the interest are deferred until you redeem the savings bonds. Under some circumstances, savings bond interest is exempt from federal income taxes when it’s used for qualifying education expenses. Safer than other types of investments: Savings bonds are considered very safe investments because they’re backed by the full faith and credit of the U.S. government and you won’t lose money, as you could with stocks.
Cons Explained
Opportunity risk: Because they earn relatively low interest yields, savings bonds carry opportunity risk, which is the risk of missing out on a better investment opportunity.Penalty for early redemption: Although you can cash out the money you invest in a savings bond plan after 12 months, you’ll give up three months’ worth of interest if you redeem your savings bonds before five years.Low returns relative to some other investments: Because savings bonds are so low risk, you will often earn less than you would through stocks or corporate bonds. One exception is when inflation is very high; in that situation, I bonds may earn more than other types of investments.
If you want to cash a paper bond, you must cash the whole thing. Some banks will cash paper bonds, or you go directly through the Treasury and follow the directions on Form 1522.
