The major purpose of having a savings bond plan is to be able to buy savings bonds automatically by having part of your paycheck deposited in a TreasuryDirect account. If you invest in savings bonds, you are faced with little to no risk over your investment, but these Treasury-issued instruments provide low interest rates.
When considering boosting your savings, you’ll likely be open to contributing to a savings bond plan. There are a few things to understand about a savings plan and how you can enroll in one as a qualified person. Read on to get the necessary information to determine whether applying for a savings bond is right for you or not.
What is a Savings Bond Plan?
A savings bond plan is a workplace system that allows employees to acquire savings bonds through deductions of payroll. These deductions are reserved until they are sufficient to purchase a savings bond on behalf of the employee. It has a close semblance as a direct deposit. However, with the savings bond your money goes to a TreasuryDirect account.
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There are two types of savings bonds that you can invest in.
Series I bonds: These kinds of bonds offer a fixed rate in interests in addition to a semiannual inflation adjustment.
Series EE bonds: EE bonds issued after May 2005 provide a fixed return rate. The ones issued between May 1997 and April 2005 provide a variable rate. A Series EE bond will have a 100% increase in value after 20 years.
These two types of savings bonds have monthly increases in interests and are sold at face value. Interest compounded semi-annually until the bonds have attained their maturity date of 30-year or you can them out. You’ll get paid the interest after you must have redeemed the bond.
You have the opportunity of deciding whether to cash out on any of the two types of savings within 12 months, but if you do, you risk losing three month of interest. So, for instance, if you decide to receive your savings bond after a period of two years, you’ll lose three months worth of interest and only get interest for 21 months.
How Does a Savings Bond Plan Work?
To get started with a savings bond plan, if you are considering one, you have to create a TreasuryDirect account and set up a payroll savings plan. After this, you’ll need to decide on your choice of savings bond type to direct your investment and the dollar amount you intend to purchase. Thereafter, create the transfer by entering “TreasuryDirect” as the receiving bank’s name and giving the appropriate account and routing numbers, just as you’d have done with setting up the automatic direct deposit
When you make a deposit, the money is harnessed in the purchase of non-interest-accruing security known as a “Payroll C of I” or “Payroll Certificate of Indebtedness,” which will be responsible for funding your savings bond purchases.
After you have accumulated sufficient cash to acquire a savings bond in Payroll C of I, an automatic purchase of savings bond will be done on your behalf from the TreasuryDirect system. For instance, you may be looking to acquire I bonds of $25 and donate $12.50 per paycheck every other week. You’ll automatically receive one $25 bond purchased by the TreasuryDirect after your first two paychecks with the use of your Payroll C of I, and after every four weeks, another $25 bond is purchased.
You can acquire up to a calendar year of $10,000 of both Series EE bonds and Series I, an aggregate $20,000 annually.
Pros and Cons of a Savings Bond Plan
Using a savings bond plan has its merits and demerits, and here are few to guide your decisions.
Pros of a Savings bond plan
- Savings bond plans are seen as a safer investment.
- Automated savings
- Tax advantage.
Cons of a Savings bond plan
- Interest rates are extremely low.
- Opportunity risk
- Early reduction attracts a penalty.
Pros of a Savings Bond Plan
- Savings bond plans are seen as a safer investment. This form of investments are regarded as safe as they have the full faith backing of the United States government.
- Automated savings. With a savings bond plan you can automate your savings and investments. Your preset amount will be deposited directly into your TreasuryDirect account.
- Tax advantages. Multiple tax benefits are accompanied by using a savings bond plan. For instance, you’ll not pay local and state income taxes on your accrued interest, and there are deferred federal income taxes on the interest until the savings bonds are redeemed. In a few situations, the savings bond interest is exempt from federal income taxes when used for qualifying education expenses.
Cons of a Savings Bond Plan
- Interest rates are extremely low. Since savings bond plans attract low risk, they also attract extremely low interest rates that you are not going to earn much from. For instance, Series EE bonds issued for a period of six months between May 2021 and October 2021 generated an annual fixed rate of 0.1%. Series I bonds issued for the same length of time generated a rate of 3.54%, which is attributed to the semiannual inflation adjustment.
- Opportunity risk. Savings bonds bear some opportunity risk which is that of losing out on better investment opportunities.
- Early reduction attracts a penalty. While you can choose to cash out when you want on a savings bond plan after a year, however, if you are redeeming the savings bonds before five years, you risk losing three months interest worth.
Vital Points To Note About Savings Bond Plan
- You can leverage on payroll deposits to automatically purchase U.S. savings bonds.
- A savings bond plan requires that you set up a TreasuryDirect account.
- Savings bonds portend low risk on investment, but that also means extremely low interest.
- You can acquire Series I bonds and Series EE bonds with your savings bond plan.