Treasury Savings Bonds

2023-05-15

What are Treasury Savings Bonds?

Treasury Savings Bonds are essentially loans to the U.S Government and are considered one of the lowest risk investments as they are backed by the full faith of the US Government. However, because of the low risk, the returns are also expected to be lower than the higher-risk stocks.

There are 2 types of Savings bonds:

EE Bonds
I Bonds

I have summarized and copied the details about the bonds from the Treasury Direct website (see References below)

I Bonds

Series I savings bonds protect you from inflation. With an I bond, you earn both a fixed rate of interest and a rate that changes with inflation. Twice a year, the inflation rate for the next 6 months is set by the government. As of May 1, 2023, the fixed rate was 0.9% and the inflation rate was 3.4%, to the total of 4.3% interest rate.
I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months the bond’s interest rate is applied to a new principal value. The new principal is the sum of the prior principal and the interest earned in the previous 6 months.
They mature in 30 years
You can cash the 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.
Electronic I bonds: Paid automatically when the bond matures (if you haven’t cashed it before then). Paper I bonds: You must submit the paper bond to cash it.
Taxation:
- Federal income tax: Yes
- State and local income tax: No
- Federal estate, gift, and excise taxes; state estate or inheritance taxes: Yes
- You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond.
- If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.

Cost of the Bonds
- Electronic I bonds: $25 minimum or any amount above that to the penny. For example, you could buy an I bond for $36.73.
- Paper I bonds: $50, $100, $200, $500, or $1,000

In a calendar year, one Social Security Number or one Employer Identification Number may buy:
- up to $10,000 in electronic I bonds, and
- up to $5,000 in paper I bonds (with your tax refund) For individual accounts, the limits apply to the Social Security Number of the first-named in the registration.

EE Bonds

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, the US Treasury guarantees that the bond will double in value in 20 years, even if they have to add money at 20 years to make that happen.
EE bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months they apply the bond’s interest rate to a new principal. The new principal is the sum of the prior principal and the interest earned in the previous 6 months.
They mature in 30 years
You can cash the 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.
Taxation:
- Federal income tax: Yes
- State and local income tax: No
- Federal estate, gift, and excise taxes; state estate or inheritance taxes: Yes
- You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond.
- If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.

Cost of the Bonds
- Electronic EE bonds: $25 minimum or any amount above that to the penny. For example, you could buy an EE bond for $36.73.

In any one calendar year for one Social Security Number, you may buy up to $10,000 in EE bonds. The limit applies to the Social Security Number of the first person named on the bond.

EE vs I Bonds Comparison

	EE Bonds	I Bonds
Maturity and Early Withdrawal	30 years Can withdraw anytime after 12 months If withdrawn before 5 years, you loose 3 months of interest	30 years Can withdraw anytime after 12 months If withdrawn before 5 years, you loose 3 months of interest
How do the bonds earn interest?	Have a fixed interest (for the first 20 years, may change in the last 10 years) Guaranteed to double in 20 years Earn interest monthly, and interest is compounded semiannually	Have a fixed interest and inflation rate Interest rate is adjusted every 6 months Earn interest monthly, and interest is compounded semiannually
Taxation	Federal income tax: Yes State and local income tax: No Federal estate, gift, and excise taxes; state estate or inheritance taxes: Yes You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.	Federal income tax: Yes State and local income tax: No Federal estate, gift, and excise taxes; state estate or inheritance taxes: Yes You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.
Contribution Limit	$10,000 per SSN	$10,000 per SSN + up to $5,000 with IRS Tax Return

Conclusion

I would consider the Treasury Saving Bonds for two scenarios:

As a replacement for a Savings Account in a bank (because it is backed by the full faith of the US Government)
Tool for building generational wealth

Let me explain the two scenarios in detail:

Replacement for Savings Account

Due to the high inflation in 2022/2023 the interest rates for savings account in the banks are currently higher. However, historically, they have been very close to 0%. In those cases, the savings bonds are better investment. Anytime the Savings Bonds are giving an interest rate that is same or higher than the interest rate on the savings account in banks, it is better to buy the Savings Bonds.

Pros:

No income tax at the state and local levels
Same or higher interest than savings account in most of the banks
Backed by US Government, that (hopefully) is not going to default

Cons:

Cannot take the money out until after 12 months
Not as liquid as cash in savings account. That is, not easy to wire the money anywhere else. You will have to first withdraw it your bank account and then wire the money from there, which adds time to the whole transaction

Tool for building generational wealth

The Savings Bonds are a great tool for building generational wealth for your kids or grandkids. You can start investing as soon as they are born, and continue till they are 20 or 30 years old, and they will have a guaranteed maximum of $20,000 in income for 20 years after they turn 20.

If the $10,000 was invested in stock market, assuming an average of 6% ROI, the $10,000 would have turned into $32,000. So, the return on investment in the stock market is significantly more. Which is why you will want to think carefully about this. With 10K in the Savings Bond you have guaranteed but lower return, however, with the investment in the stock market (for example, S&P 500 index fund) will yield you more, but it is not guaranteed that the higher yield will be available when needed; ie, the need may happen during a low tide in the stock market, in which case, the return could be lower than expected.

Therefore, my recommendation is to use the savings bonds for your kids or grandkids for helping them build wealth. To build your own wealth, I would recommend looking into stocks or other alternative investments. For yourself, use the Savings Bonds to preserve wealth, not build it.

Personal Finance