The Pros & Cons of Buying US Saving Bonds

by Michael Keenan
Savings bonds are exempt from state and local income taxes.

U.S. savings bonds are debt securities issued by Uncle Sam to help finance the federal government. Unlike other securities, they can be held in a minor's name. Depending on your purpose for buying savings bonds and your time frame for holding them, they may have a place in your investment portfolio.

Safe Investment

According to the Securities and Exchange Commission, savings bonds are one of the safest investments because they are backed by the full faith and credit of the government. If you invest in stocks or bonds, the company issuing them may do poorly and the investment could lose money. If the company goes out of business, you could lose your entire investment.

Tax Breaks

If you hold money in a deposit account, you pay taxes on the interest each year, which reduces the amount of money you have to earn interest on the next year. With a savings bond, you can pay taxes on the interest it earns each year, or you can put off paying the taxman until you cash the bond. That way, you don't have to worry about finding the money to pay the taxes yearly. You don't have to shell out any state or local income taxes on your savings bond income.

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Lower Rates

The interest rates on savings bonds often don't measure up to the potential gains you could earn by investing in the stock market. For example, as of late 2013, Series EE bonds were returning just 0.2 percent a year. However, if you hold an EE bond for 20 years, it's guaranteed to double in value. If you cash the bond before then, your investment return will be less.

Early Withdrawal Penalty

After you buy a savings bond, you can't cash it out for a least 12 months. Even if you really need the money, you're out of luck. Also, if you cash the bond in after one year but before five years pass, you lose three month's worth of interest as a penalty for the early withdrawal. If you cash a bond after 36 months, you'll only receive 33 months of interest.

References

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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