What is a Savings Bond and How Does It Work

Saving bonds are non-marketable securities which can be purchased by citizens of the United States or any other nation for that matter, for investment purposes.  In US, these bonds are issued by the US Treasury Department, hence they can only be sold or bought from a US Department’s designated agent, who has the authority to issue and redeem these saving bonds.

Given the uncertain nature of world economy, US saving bonds are one of the most reliable investment options available to an individual. However, before you invest, you should have clear understanding of the how these type of bonds work. The important factors to consider are payments, maturity, interest and tax status.

Instructions

  • 1

    You will start the process by opening an account with your local bank, with the minimum amount being $25. Your bank account will be linked to the Treasury Department’s own account (online), where you can get started by buying multiple types of Treasure securities. Little personal information is required as we assume that the government already has everything at their disposal.

  • 2

    The benefits of saving bonds are somewhat complex for an individual as compared to the government. For the latter, they are simply earning money and will use that for various purposes - expenditures.

    However, for an individual, the preferences may differ and therefore, it is important that one knows how the bond status works. These bonds have a long term maturity, usually 30 years, and in order to reap full benefits, one needs to keep the bond until the maturity date.

    Any early withdrawals can result in penalty.

  • 3

    If you are aiming for a risk-free investment, where your sole purpose is to the principal amount, then purchasing these securities is a wise option. Typically you will earn interest but that will vary according to the type of bond you have bought. Market will have its own influence but that will be minimal.

  • 4

    The other major benefit is the tax related. Firstly, these bonds will not be subject to income tax on the interest rates earned. Moreover, you can get a total tax exempted status if you redeem these bonds for Education purpose. However, much will depend on when you actually redeem the bond.

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