what are the pros and cons of savings bonds and how do they work?
by admin ~ June 7th, 2007 . Filed under: Investing .
qtlene1 asked:
I’m thinking of purchasing to save for the future
Craig Ausley
I’m thinking of purchasing to save for the future
Craig Ausley
June 10th, 2007 at 4:15 am
The pros of savings bonds is that u are a loe risk for lost of money since they are very secure and a good way to invest inlong term
The cons of savings bonds is that it takes years to earn a decent return on them but in the end they are a good investment for the future
June 13th, 2007 at 8:39 am
Different types of savings bonds, but the most typical one is the EE bond. You purchase it for half the face value ($50 bond, you purchase it for $25). Hold it for however long time period you want, they stop earning interest after 30 years. You can cash it in, although if you cash it in within the first 5 years you lose a certain amount of interest. When you cash them in, you get what they are worth at that point in time, and at the end of the year will get a 1099-Int from whatever bank you cashed them in at. You have two choices on how to handle the interest from savings bonds, you can either wait until you cash them in, or declare the interest that the bonds have accrued during the year for that years interest (the change in value from one year to the next is the interest). Pros are that they are a safe investment, and don’t do too bad with interest rate, cons are that because they are a safe investment you don’t expect to make a lot of money in them, unlike the stock market.
You can also use savings bonds for education purposes, and if you meet all the requirements, the interest is not taxable when you cash the bonds in.
June 16th, 2007 at 8:50 am
Savings bonds are debt obligations issued by the U.S. government. They are considered one of the safest instruments you can buy and sometimes called risk free, since it is backed by the full faith and credit of the U.S. government.
There are 2 types of US Savings Bonds - Series EE and Series I bonds - that are still available to the public. You accrue interest over 30 years on both instruments.
You pay face value for Series EE bonds online ($50 for a $50 bond), but 50% of face value ($25 for a $50 face value bond) if you buy a paper bond. They offer 3.4% right now (subject to reset in Oct 2007).
Series I bonds pay two forms of interest - a fixed rate plus an inflation adjustment based on the CPI index.
You have to hold savings bonds for atleast 5 years, or you pay a 3month interest penalty (interest is deducted from your bond when you cash it if before 5 years).
The pros include safety of your principal, tax free in most cases for interest(federal, city and state) and you can use them for education.
The cons include the restrictions in selling or cashing the bonds and the low rates (because of the safety). Right now, FDIC insured online savings accounts (no minimums and no restrictions on your cash) are paying noth of 4.5% up to 5.5% aprs.
June 16th, 2007 at 11:28 pm
The only major “con” is that the current yield on savings bonds is pitifully inadequate compared with similar fixed-income investments. Newly purchased EE bonds yield 3.40% and newly purchased I bonds yield 3.74%. Unfortunately, that’s a huge negative, so you probably shouldn’t consider savings bonds until their rates improve by at least 1% - 1.5%.
If and when the rates improve, there are significant advantages to savings bonds compared with bank CDs and other safe investments. Here are several:
1. Savings bonds always earn interest starting from the 1st of the month in which you purchase them. That means you can time the purchase to buy at the end of a month and get, in effect, almost a whole month of free interest.
2. Savings bond interest is always exempt from state and local taxes.
3. Savings bond interest can be exempt from federal taxes if used for funding educational expenses for yourself, your spouse, or your children. Income limits and other restrictions apply.
Advantage #3 includes cashing in savings bonds to make contributions to 529 plans. I have been taking advantage of that feature for several years now.
June 19th, 2007 at 2:21 am
Like many have said before me,
Pro-Safe Investment
Con-Low Return
I have a savings account with Ingdirect.com that earns more(4.5%apy actually). You’d be better off sticking your money on there then buying a savings bond. And if you do decide to do that, contact me first so we can both get a bonus for you opening an account(you get $25, I get $10 for the referral).