Government savings bonds have a special place in my heart. My grandpa often tells stories about using payroll deduction to buy bonds when he was a civil service employee in the 60s and 70s. As he tells it, you could buy 1/3 of a bond for $6.25, and receive a bond for $18.75 every third paycheck – he talks wistfully about how he would sometimes have my grandma cash one in when they couldn’t quite make ends meet for their 6 children. Years later, the bonds they kept were worth thousands of dollars, and he and my grandma chose to buy their grandchildren savings bonds in addition to small gifts for birthdays and holidays. I cashed in some of those bonds to buy my laptop when I started college, and cashed in a few more when I graduated from school and needed some cash for start-up expenses. I still have a decent chunk stashed away for an eventual house down payment – and I couldn’t be more grateful to my grandparents for having the foresight to start saving in my name all those years ago.
My younger cousins still get savings bonds from our grandparents, but that tradition just became a little harder for my technologically-challenged grandparents to continue. I was a little saddened to hear a recent NPR report informing me that as of December 31, 2011, savings bonds will only be available online directly from the Treasury. The Treasury cites the $24 million annual cost of printing and mailing paper bonds, as well as the waning popularity of savings bonds and proliferation of e-commerce, as the primary reasons for the change.
Savings Bonds go Paperless
Up until now, you could buy savings bonds at any bank or credit union and gift the physical paper bond to the recipient of your choice. As of January 1, you must purchase bonds online at www.treasurydirect.gov. If you wish to gift a bond the recipient must have their own TreasuryDirect account, where you can essentially transfer the bond electronically. The entire transaction takes place online.
New Rules for Buying Bonds
To buy bonds, set up an account at www.treasurydirect.gov. You can purchase Series EE bonds (which pay a fixed interest rate) or Series I bonds (which have an interest rate that varies with inflation). You can buy up to $10,000 of each series per year. Bonds are sold at face value, which means you pay $50 for a $50 bond. This is a change from paper bonds, which were sold for half of their face value and reached face value at maturity. Bonds can be cashed in 12 months after purchase, but you will forfeit the last 3 months’ interest if you cash them in within 5 years of purchase. Bond interest is state and municipal tax-free, and you pay federal taxes only when redeeming the bond. Savings bonds have lost popularity over the last several years, but are still a great way to save money for your own future or that of your loved ones.
Exception for I Bonds
One way to purchase savings bonds in the past was to receive all or part of your tax refund in bond form. This option is available in 2012 for Series I bonds only. You can receive up to $5,000 in paper Series I bonds by making the election on IRS Form 8888 when filing your tax return. You may purchase bonds for yourself or a gift recipient in $50 increments. You can choose to receive the remaining amount of your refund by check or direct deposit. See the TreasuryDirect page on tax refunds and I Bonds for more information.