The Advantages of US Saving Bonds

by Geri Terzo

Investing in U.S. savings bonds provides stability in an investment portfolio. The likelihood that the federal government defaults on these loans remains low, although the credit rating of U.S. debt was downgraded in 2011, and investors can reasonably expect to earn steady returns. Features attached to these bonds can be attractive and may allow investors certain tax advantages when investing for a specific purpose, such as education. There is flexibility tied to the financial and duration terms associated with U.S. savings bonds.

Features

U.S. savings bonds can be purchased in increments of $25, which is lower than the minimum investment requirement for other Treasury securities. Investors can earn interest payments on these debt securities for up to three decades and are not locked in for the duration of the contract. Bondholders can opt to cash in and sell a bond after only 12 months; however, a penalty applies if investors redeem a contract before five years.

Education

The federal government offers incentives to investors who purchase U.S. savings bonds for the purpose of funding a college education. Among the perks, investors become shielded from individual state income tax on these securities, according to the Retirement Planning Services website. Under certain conditions, investors could become exempt for federal taxes, too. To qualify, the bondholder or beneficiary must earn an income below a certain threshold. Any proceeds earned from U.S. savings bonds can be directed towards approved college expenses, including tuition.

Interest Rates

Investors are not likely to experience surprises when it comes to the returns that a U.S. savings bond will generate. Beginning in May 2005, the US government attached a fixed interest rate for EE bonds, a type of U.S. savings bonds, according to Treasury Direct. The rate is locked in for at least the first 20 years of a contract, at which time the interest rate may be reviewed. Fixed rates may be assigned to newly issued U.S. savings bonds twice each year.

Change

U.S. savings bonds can be used to save toward a major event, such as retirement or college, and these securities can also be given as gifts. According to PBS, the U.S. government is changing the way that government savings bonds can be purchased. Beginning in 2012, paper bonds can no longer be obtained, and instead investors must purchase these securities electronically over the Internet. The advantages associated with these securities, including low risk, stable returns and tax benefits, remain.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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