What is a savings bond?

United States Savings Bonds were first introduced in 1935 as a way to encourage “broad public participation in government financing.” Issued by the Department of the Treasury, Savings Bonds are less susceptible to market conditions and are backed by the full faith and credit of the U.S. Government.

Savings Bonds have been popular as birthday and graduation gifts ever since they were introduced. They can also be used toward financing education, supplemental retirement income and other special events. Unlike other securities, minors may hold U.S. Savings Bonds in their own name.

While originally sold through selected financial institutions, as of January 1, 2012 the Treasury Department mandated that Savings Bonds could only be purchased online with a free account at TreasuryDirect.gov. This action supports the Department’s goal to decrease expenses by increasing the number of electronic transactions with U.S. citizens and businesses.

If you are currently holding paper Savings Bonds, you can continue to redeem them at participating financial institutions including any Community Bank of Tri-County branches, as well as register your Savings Bonds on TreasuryDirect.gov for easy record keeping. The Treasury’s Savings Bond calculator can help you determine the current value and interest earned on your paper bonds.

Through TreasuryDirect.com you can purchase, manage and redeem two types of electronic bonds:

Series EE U.S. Savings Bonds are an appreciation-type (or accrual-type) savings security. They are sold at face value, so you’ll pay $50 for a $50 bond. The bond is worth its full value upon redemption. The interest is issued electronically to your designated account. You cannot buy more than $10,000 (face value) during any calendar year and, if you redeem the Bonds within the first five years, there is substantial penalty.

Series I U.S. Savings Bonds are inflation-indexed bonds sold at face value. You can buy up to $10,000 (face value) in any calendar year. Series I Bonds offer a fixed rate of interest, adjusted for inflation. As with Series EE Bonds, if you redeem Series I Bonds in the first five years, there is a penalty.

Savings bonds also offer tax advantages. Interest is exempt from state and local income taxes. Federal income tax is deferred until your bonds mature or you redeem them, whichever is first. Also, if all conditions are met, using savings bonds to pay for some education expenses may offer additional federal tax benefits. (As always, you should consult with a tax advisor about your particular situation).

Thinking of investing in savings bonds? Click here for quick comparison of Series EE and Series I interest rates. This Glossary of Terms from the Department of the Treasury may also be helpful.

Have you ever given, or received, a Savings Bond?

1 http://www.treasurydirect.gov/indiv/research/history/history_sbbegin.htm

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