U.S. Savings Bonds are oftentimes a good investment, even if the current rate of interest is not as attractive as other investments. They are backed by the full faith and credit of the U.S. government, and are similar to U.S. treasury bills and treasury notes, which are direct obligations of the government. They are as secure as the government.
A significant benefit of U.S. Savings Bonds is they are state tax exempt. As a general obligation of the federal government, federal income tax is due on the interest, but there is no state income tax due. Also, income taxes are not due until the bonds are redeemed in most cases.
If a bond is bought later in life, upon retirement, it may be cashed in when the owner is likely to be in a lower income tax bracket. However, if the amount of interest is significant, the income received on a bond may also place the individual in a higher income tax bracket, as well as require a portion of the Social Security benefit to be income taxable. One good thing though, if an individual doesn’t have a knack to save money, payroll deductions to buy bonds may be a good way to create a forced savings and supplement retirement.
Another good thing about bonds is that they bonds are fairly liquid and may be cashed in one year after the purchase. They can be redeemed with no loss of interest after five years of the purchase. If the bond is redeemed within the first five years, there will be a loss of interest equal to the last three months’ worth of the interest accrued.
Purchasing bonds for children is another popular option, and there is an alternative to paying the income tax when the bonds are redeemed that your accountant can discuss with you.
Bonds are also an option to establishing trusts in certain cases, such as 529 Education Plans and Uniform Transfers to Minors Act Accounts. Remember though that before purchasing a bond or electing which method of tax reporting to establish, a financial advisor or accountant should be involved to advise you on those decisions.
Hyman G. Darling, Esq.
Photo Credit: Microsoft
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