Savings Bonds - How and Where To Buy US Savings Bonds

There are two types of savings bonds you can buy: Series EE savings bonds, and Series I savings bonds.

Now don't panic. Here's the very simple difference between the two:

EE savings bonds have a fixed interest rate.

I savings bonds have a variable interest rate.

If you're thinking, "I just want a plain vanilla old savings bond," then go with the Series EE savings bond. They're the closest thing currently available to the old-school savings bonds.

Read on for the in-depth differences between the two types of US savings bonds.

The US Treasury Department will stop issuing paper savings bonds. Here's the announcement:

Treasury to End Over-the-Counter Sales of Paper U.S. Savings Bonds; Action will save $70 million over first five years

July 13, 2011

WASHINGTON - The Bureau of the Public Debt announced today that as of January 1, 2012, paper savings bonds will no longer be sold at financial institutions. This action, which supports the U.S. Department of the Treasury's goal to increase the number of electronic transactions with citizens and businesses, will save American taxpayers approximately $70 million over the first five years.

But savings bonds, introduced in 1935, are not going away. Electronic savings bonds in Series EE and I will remain available through purchase in TreasuryDirect®, a secure, web-based system operated by Public Debt - where investors have been purchasing savings bonds, available 24/7, since 2002.

"Savings bonds are very much a part of this country's history and culture, and will remain a part of America's future - but in electronic form," said Public Debt Commissioner Van Zeck. "It's time for us to take a 1935 model and make it a 21st century investment tool."

Ending over-the-counter (OTC) sales of paper savings bonds at financial institutions is a continuation of Treasury's all-electronic initiative announced in April 2010. As part of the initiative, Treasury stopped the sale of paper bonds through traditional payroll plans, effective December 31, 2010. It is estimated that ending the sales of paper payroll and new issues of OTC bonds will save a total of $120 million over the next five years in areas such as printing, mailing, storing bond stock and fees paid to financial institutions for processing bond applications.

"Through TreasuryDirect, investors have an easy and convenient way to purchase and manage their bonds free of charge," Commissioner Zeck said. "Investors will no longer have to worry about misplacing, losing or storing paper savings bonds."

Opening a TreasuryDirect account is free, and, once it's established, investors can:

Buy, manage, and redeem Series EE and I electronic savings bonds.
Convert Series EE and I paper savings bonds to electronic through the SmartExchange® feature.
Purchase electronic savings bonds as a gift.
Enroll in a payroll savings plan for purchasing electronic bonds.
Invest in other Treasury securities such as bills, notes, bonds, and TIPS (Treasury Inflation-Protected Securities).
Those currently holding paper savings bonds can continue to redeem them at financial institutions. Bonds, which have not matured, but were lost, stolen or destroyed, can be reissued in paper or electronic form.

Series I paper savings bonds remain available for purchase using part or all of one's tax refund. For more information on this feature, visit www.irs.gov.

For more information about the elimination of paper savings bonds and how to enroll in TreasuryDirect, visit www.treasurydirect.gov.

Series I savings bonds are intended to help you save money and prevent the value of your savings from being eroded by inflation. (Because many are afraid of looming inflation of the US dollar in the near future, I bonds are especially interesting.)

Here is the high-level overview of the Series I savings bond:

• Sold at face value


• Earn interest at a composite rate composed of a fixed rate plus a variable rate based on changes in the Consumer Price Index for Urban Consumers (CPI-U)


• Interest accrues monthly


• Up to $5000 each of paper and electronic bonds can be purchased per social security number per year


• Backed by the full faith and credit of the US government

Now, I know what you're thinking: "Fixed interest rate plus variable? CPI-U?" It sounds complicated but just skip the details. Here's the bottom line: I bonds earn interest at the rate of inflation plus a little bit. Therefore you're always ahead of inflation.

Being ahead of inflation is very exciting to a lot of savers and investors, because there are very few assets that are guaranteed not to lose value in an inflationary environment. Savings accounts and CDs can be losers after inflation is calculated. For example, in January 2010, the CPI-U inflation rate was 2.6%. The average savings account yielded a mere 0.80%. That means that savers actually lost 1.8% after inflation.

When you think about the corrosive effects of inflation, you will quickly realize that I bonds are an outstanding asset for savers who want a stable asset that won't lose money. It's even more awesome when you consider that not only will you not lose money, but that some of your bonds will have Albert Einstein on them. How awesome is that?

If you're excited about I bonds and want to learn more, Mel Lindauer did a great series of four articles for Forbes extolling the virtues of the I bond:

Risk-Free Yield? Consider I Bonds

The ABCs of Risk-Free I Bonds

I Bonds: The College Tax Break

Let Us Buy More I Bonds

Series EE savings bonds are pretty straightforward. You buy them for 1/2 of face value, they earn interest, you redeem them. If you hang onto them long enough they double in value.

Now we'll take a closer look at the Series EE savings bond. Here is a high-level overview:

• Earn a fixed interest rate (fixed at the time of purchase)


• Interest is accrued every month and is paid when you cash in the bond


• Must be owned 1 year minimum to be cashed in


• Receive a one-time adjustment at the time of maturity (20 years after they're issued) to double in value


• Maximum of $5000 each in paper and electronic EE bonds can be purchased per social security number per calendar year


• Backed by the full faith and credit of the US government

Series EE savings bonds are meant to be saved for a long time -- in this case, 20 years. After 20 years they double in value. Before the 20 years are up they accrue interest.

Paper EE bonds are issued in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. Remember that, since you pay 1/2 of face value when you buy them, they're not worth twice as much right away.

The only confusing thing about Series EE savings bonds is that they're not worth what it says on them unless you wait until the full term. Electronic EE bonds are easier to understand because they're worth exactly what they say and there's no confusing paper to befuddle you.

Remember, Series EE savings bonds are meant to be purchased and put away for a long time.

Still confused? Check out the TreasuryDirect FAQ on Series EE savings bonds.

The two different kinds of savings bonds available are very different. If you've definitely decided that you want to purchase a savings bond but aren't sure which to choose, ask yourself these questions:

Am I worried about inflation? If the answer is yes, choose I series savings bonds.

Am I saving for college? Both types of savings bonds are suitable for funding any kind of education-related expenditure.

Am I worried about security? Again, both types of savings bonds are backed by the full faith and credit of the US government, and are among the safest investments in the world. However, in the USA bank accounts are also insured. So if you can get a higher return on your investment in a savings account or CD that's FDIC or NCUA-insured, do that instead!

Is this intended as a gift? Both types of savings bonds are suitable as gifts -- however, traditionally, the EE-type bond is more frequently chosen as a gift for a child.

Do I want the best possible return on my investment? In this case, savings bonds are simply not for you. Consider investing in a corporate bond fund, stocks, or a similar high-yield investment.

Am I saving for a goal less than 5 years away? If so, savings bonds are not a suitable investment. There are small interest penalties involved if you redeem a savings bond within five years of purchase.

The bottom line: Savings bonds are a suitable medium-term investment. Over ten years or so, you're better off with a bond fund. I bonds are great hedges against inflation, but otherwise savings bonds simply are not great investments. They are for the very risk-averse (think widows and orphans).

When you're ready to buy savings bonds, the next step is knowing where to go. There are two places you can buy savings bonds.

Where you buy your savings bonds can be important because there are limits on how many savings bonds you can buy in a year.

Buy electronic savings bonds at TreasuryDirect.gov
The US Treasury Department maintains a website, TreasuryDirect.gov, where you can buy electronic savings bonds (both EE and I series). It takes a little while to sign up for an account. You have to sign up online, after which you're mailed a signature form. You return the signature form and then you're mailed a "secret decoder ring" (actually a credit-card-sized code) that's required to sign into your account. This process takes about 2 weeks.

After you manage to complete this, you can log in and buy both I series and EE series savings bonds. Remember, you can buy up to $5000 dollars of each type of savings bond each calendar year.

So, even though it takes a while, it's worth it to register at TreasuryDirect.gov. Plus, it's the only way to buy electronic savings bonds.

Electronic savings bonds can be purchased in any amount to the penny (minimum of $25 per purchase).

How to buy paper savings bonds
Most banks can help you buy a paper savings bond. Call banks in your area. Branches of national banks are more likely to have what you need than small local banks.

Ask the bank teller for either the EE bonds or I bonds form. You will need to fill out the form and pay the teller for the bond. The bank sends the paperwork to the Treasury and, within 15 days, the Treasury department mails you your savings bond. Keep it in a safe place!

Paper savings bonds can only be purchased in the offered denominations. That is, denominations of $50, $75, $100, $200, $500, $1,000, $5,000 (and $10,000 for EE savings bonds).

The only downside of paper savings bonds is that you can lose them (in a robbery or a fire, for example). If your paper bond is lost or destroyed you can get it replaced.

You're required to provide a social security number for a savings bond you're purchasing. If you're buying a paper savings bond as a gift and don't have the recipient's social security number, then the Treasury department says:

"But, if you're buying a gift and don't know the person's number, you can use your own. Using your SSN doesn't mean you will have a tax liability when the bond is cashed. The bond owner will be asked to provide his or her Social Security Number for tax purposes when they cash the bond."

1. When you buy a savings bond, interest is accrued from the beginning of the month, even if you buy the bond on the last day of the month. So you can get just a little more juice out of your investment if you buy your bond at the end of the month. Mnemonic: Blast (Buy last)

2. Conversely, when selling a savings bond you automatically get all the interest for the month you sell in. So sell on the first day of the month! Mnemonic: Self (Sell first)

3. Savings bonds can be redeemed tax-free if you're using the proceeds to pay for education-related expenses. However, the savings bonds must be in the parent's name for a child under the age of 18. Don't buy savings bonds in a child's name if they're intended for education!

4. Confused about the value of your savings bond? Here's the Savings Bond Calculator to save the day!

There are a few great websites to visit when you have questions about savings bonds. Here are my favorites:

Savings Bond Value Calculator
How much is it worth? Use TreasuryDirect's savings bond value calculor.

SavingsBonds.com
A comprehensive website including links to all the forms you need and a comprehensive I bonds vs. EE bonds analysis. Highly recommended reading.

Introduction to Savings Bonds
The US Department of Treasury's one-page introduction to the savings bond, explaining the history of savings bonds. While you're there, visit the Bureau of Engraving & Printing as well!