US Government Savings Bonds

Answer 1

If you are looking for an investment vehicle that allows you to build interest upon your money, tax free, then you might want to consider US government savings bonds. While the government savings bond might seem a little outdated or old-fashioned in today’s high tech world, it remains a relatively safe, secure, and low-risk option to assist in building your savings. Not only this, but the government bond can be a wonderful tool to keep your money from being taxed locally, at the state level, and federally as well if you play your cards right.

Your Options

There are two types of government savings bonds currently available. The first is the series EE bond and the second is the series I bond, both of which can be purchased in amounts of up to $5000 per social security number, per calendar year.

The EE series bond has an interest rate based upon the average of the 5-year treasury securities yield. The I series bond has a fixed rate as well as a variable rate based upon the CPI-U (Consumer Price Index – All Urban Consumers). Both series of bonds will compound interest semiannually for 30 years, and both can be redeemed after 12 months, but it is important to note, a 3-month penalty will be incurred if the bond is redeemed any time during the first 5 years.

Keeping it Tax Free

Now it is important to realize that once you redeem the bond, you will have to pay federal taxes (government EE and I series savings bonds are exempt from state and local income tax) upon the bond. However, there is a way around this, and it is completely within the letter of the law. You may be excluded from federal taxes as well on the bond if that money is used for educational expenses. There are certain requirements to qualify for these exceptions however, and it is important fully to understand these requirements before assuming you are excluded from the taxes.

To become more familiar with savings bonds in general, you can visit www.treasurydirect.gov, and to learn more about the educational requirements for tax exclusion you can go to www.treasurydirect.gov/indiv/planning/plan_education.htm.

Sources:

U.S Department of the Treasury, Bureau of the Public Debt. Treasury Direct. www.treasurydirect.gov [Online] March 19, 2010.

Disclaimer:

This article is for informational purposes only. The author is not a licensed financial professional or tax expert. Any action taken by the reader due to the information provided in this article is at the reader’s discretion.