When my husband and I got married, we were young, but we were always thinking about saving money. My husband had $25 taken out of every paycheck for his employer to buy him savings bonds. (Back then, $25 was about 15 percent of our rent.) I started setting aside similar sums of money into savings, as my jobs didn’t buy savings bonds.
When we got divorced, there was a nice pool of bonds and cash to split. In fact, there was enough to cover my college tuition for the next two years.
So, should you be investing in U.S. savings bonds? Oh yes!
Actually, it’s a little more complicated than that. But, let’s start with “yes” as the premise.
The pros of savings bonds:
- They are easy to invest in. You can even buy savings bonds online.
- Many companies offer the option to buy bonds via payroll withholding.
- The IRS allows you to use your tax refund to buy savings bonds.
- You can buy them as gifts for anyone.
- You don’t need to pay brokers’ fees.
- You can buy them in very small ($25) or large ($5,000) denominations.
- If you lose them, you can recover them with the Treasury Department’s help.
- You have the option of reporting the interest each year, as it accrues, or at the end, when you cash it in.
- Unlike stocks, money market accounts, real estate, partnerships, and the like, you can never lose money on U.S. bonds. While they may not earn much, you will always get at least what you paid for them, if not more.
- Certain bonds can be used to pay educational expenses. If you do that, you won’t pay taxes on the earnings.
- Interest income on these bonds is not taxed by states.
The cons of savings bonds:
- The interest rate is not all that high.
- If you redeem them in less than five years, you will lose the last three months’ worth of interest.
- When you hold them past their maturity rate, your bonds will stop earning interest after a certain number of years.
- There are limits on how much any one person (based on social security number) can spend on U.S. savings bonds in any one year.
- When you inherit U.S. savings bonds, you may have to pay taxes on them. Without knowing if the deceased paid taxes on the interest in his or her lifetime, you may have to pay tax on all the interest. The only records to prove this are the deceased’s own tax records. And even if the interest is reported, the tax return may not specify which bond’s interest is being reported.
Any habit that has you socking away a fixed amount of money that you cannot touch is a good habit. Be realistic with yourself. How much can you handle not wasting on impulse buys each week? Multiply that amount by four. That’s how much you can afford to put into savings of one sort or another.
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Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.