Returns on savings bonds are so low that they’ll never make you rich. In fact, returns are so low that large pension funds and other big investors don’t purchase savings bonds. However, for many individuals, savings bonds are the best approach for saving money.
Factors favoring savings bond are that you can
Save automatically. Employers who sponsor savings bond programs can automatically deduct amounts you designate from your paychecks to purchase bonds.
Diversify your risk. If you already have investments in stocks and bonds, you may want to invest in savings bonds. Doing so adds a no-risk element to your investment portfolio.
End up with a safe investment. In exchange for a low return, savings bonds offer absolute safety for the principal investment; they’re absolutely no-risk investments.
Avoid paying any sales commission. Investing in saving bonds doesn’t require the services of a broker to help you purchase them.
Invest minimal amounts. The minimum investment in a savings bond is $25. If you subscribe to an employer-sponsored program, the minimum amount you pay each week can be even lower.
Pay no or low taxes. The difference between the purchase price and the redemption value of Series EE bonds and the payment made on HH bonds comes in the form of interest. Interest income is subject to federal income tax but not state or local income taxes. You can defer paying federal income tax on the interest until you cash in the bonds.
Gain educational tax benefits. The Education Bond Program allows interest to be completely or partially excluded from federal income tax when the bond owner pays for qualified higher education expenses at an eligible institution or state tuition plan in the same calendar year the bonds are redeemed.
Disadvantages of savings bonds include the fact that you
Face penalties for early redemption. If you cash in your Series EE bonds after you’ve held them for six months, you’ll pay three months’ worth of interest — ouch! Series EE and Series I bonds cease paying interest after 30 years.
Need to be careful when you redeem your bonds. Make sure that you know when interest is posted. If you redeem a bond right before interest is posted, you won’t reap your interest payment. If you redeem your bond early on in the same month that interest is posted, you may lose six months’ worth of interest.
Sometimes you can spend and save at the same time. At BondRewards, you can shop online at your favorite stores (more than 150 online stores participate in the program) and receive a small percentage of your purchase price in the form of a U.S. Savings Bond.
Check in your safe-deposit box or among the papers of elderly relatives for old bonds. More than $2 billion in savings bonds never have been redeemed.
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Source:http://www.dummies.com/how-to/content/savings-bonds-pros-and-cons.html
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