What are savings bonds?
Savings bonds are loans to the government for a predetermined period of time (generally seven years or longer). They were designed primarily to help fund the U.S. war effort in World War II and were originally called war bonds. After the war, the bond program was continued and retitled U.S. savings bonds.
In essence, the U.S. savings bond program is a method by which the United States government, who usually lacks the amount of funds needed to meet existing obligations, can borrow from you, a resident in the United States, with a promise to repay the amount that was borrowed from you, with interest, after a certain number of years. U.S. savings bonds are the investments that make it possible for our government to run the huge budget deficits that make trade shortfalls an ever-present fact of American life.
Since U.S. savings bonds are obligations of the U.S. government, in that they are loans made directly to the government, they are considered to be as secure as the U.S. government. On a scale of 1 to 10, I would give savings bonds an income rate of 5, a growth rate of 0, and a risk of 1. Interest paid on savings bonds is exempt from state and local income taxes, and federal income taxation can be postponed until you cash your bond or until it stops earning interest in 30 years. In addition, lost, destroyed, or stolen bonds can be replaced.
Types of savings bonds
Three types of U.S. savings bonds are offered, namely Series EE bonds, I bonds, and HH bonds. Series EE bonds are an appreciation-type security that is issued for terms totaling 30 years. The I bond was introduced in 1998 and is indexed for inflation. Series HH bonds are current income securities issued for terms totaling 20 years, consisting of a 10-year original maturity period and a 10-year extension. HH bonds are issued only in exchange for accrual bonds with redemption values totaling $500 or more.
Series EE bonds are purchased at half their face value or denomination. So, you would purchase a $100 Series EE bond for $50. I bonds are purchased at face value or denomination. So you would purchase a $100 I bond for $100. You can buy up to $15,000 ($30,000 face value) of Series EE bonds per year. You can buy up to $30,000 of I bonds per year. The limits are independent of each other, meaning you could buy up to $45,000 annually in bonds.
EE savings bonds are issued in denominations of $25 or more, with maturation periods of seven years or more. Savings bonds accumulate interest and pay the face amount (principal and interest) on redemption. The method by which savings bonds accumulate interest is not uniform, and if you cash them in between distributions periods (generally every six months) you will lose the undistributed interest. In other words, if you cash them in one day before the interest is distributed, you could forfeit six months of interest earnings.
Series EE bonds earn market-based rates that change every 6 months. There is no way to predict when a Series EE bond will reach its face value. I bonds are an accrual-type security. This means that interest is added to the bond monthly. The interest is paid when the bond is cashed. An I bond earns interest for as long as 30 years. The interest accrues on the first day of the month and is compounded semiannually. The earnings rate of an I bond is determined by a fixed rate of return plus a semiannual inflation rate. The fixed rate remains the same for the life of an I bond.
Both Series EE and I bonds can be cashed anytime after 6 months. However, they could carry a significant interest penalty for early redemption. In fact, if you cash an I bond within the first five years, you will be penalized by losing three months worth of interest. On the other hand, if you do not cash your Series EE bond before the maturity date, you will be losing money because the bond will no longer be earning interest after the maturity date. In essence, the bond would represent a free loan to the federal government.
Because Series EE savings bonds are nonnegotiable registered securities, generally ownership cannot be transferred to anyone at will. However, they may be able to be transferred under unusual circumstances but with very rigid restrictions. In such cases, there would be considerable tax consequences at the time of transfer.
Using bonds for college
Series EE bonds or I bonds purchased in your name after 1989 can be used to pay for college tuition for your children or for you, and the interest may not be taxable. They have to have been issued while you were at least 24 years old and the exclusion is not available for taxpayers who file as Married Filing Separately. For full details concerning using bonds to pay for college tuition, contact your local office of the Internal Revenue Service and request IRS Publication 550 and IRS Form 8815.
If you change your mind
If after purchasing a bond you decide you do not want it, you can apply for a refund of the purchase price only (you will receive no interest on the bond) by completing and signing Public Debt Form 2966. Send the completed form with the bond to the nearest Federal Reserve Bank that provides savings bond services.
Savings bonds are a contract evidencing a loan made to the United States. Bonds are a safe and secure way of saving, because they are backed by the full faith and credit of the United States. However, when considering investing in savings bonds you must take into account the many ways the government spends money. Whether promoting abortion, supporting artists who produce blasphemous or pornographic exhibits, or undermining traditional values through humanistic education and welfare programs, there is much for a Christian to be concerned about.
Copyright Crown Financial Ministries. Used by permission. All rights reserved. For more information about this and other financial resources, please visit www.crown.org.