Savings Bonds: Pros and Cons
Over the years, my kids received savings bonds as gifts for various occasions. We held the bonds to maturity and recently turned over the money to the two oldest kids. In both cases, the extra money came in handy. For my oldest, it provided a bit of a cushion between her college graduation and the start of her first job. For the second oldest, we used the money to cover her books and a few other expenses at the start of college.
While they make a nice gift, are savings bonds a good investment? Here are a few pros and cons:
- They are safe, insured by the full faith and credit of the U.S. government.
- They can be purchased directly from the government with no fees to a broker or an agent.
- You can invest for as little as $25.
- You can purchase them through some employer-sponsored plans.
- Interest is generally exempt from state income taxes. Federal income taxes can be deferred until the bonds are redeemed.
- If the bonds are used for higher-education expenses, some or all of the interest may be excluded from federal income taxes.
- They are relatively illiquid. Generally there are penalties for early redemption, so these are inappropriate investments for short-term needs. This is not a place for your emergency fund.
- You need to track when interest payments are posted. If you redeem a bond just prior to the next interest payment date, you will miss out on that interest.
- You have to redeem the bonds. Millions of dollars in old savings bonds are sitting in safety-deposit boxes gathering dust and have ceased to earn interest.
- Interest rates may or may not be competitive. At times, this can be a pro as well. You will need to look at the rates over time, because a component of the interest rate is variable.
Savings bonds have their place as a savings vehicle for many of us. Be sure to understand when they are appropriate and when there might be a better alternative.
Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.