Radical Guide to Bonds: Limitations of US Savings Bonds

You will find some limitations in owning these bonds when compared to owning bonds in your brokerage accounts.  Consider these:

  • You cannot trade U.S. Savings Bonds.  No traded market exists.  You buy, hold until the redemption, or cash out prior to redemption.  On the last point, you cannot redeem the bonds inside of 1 year and any redemptions before 5 years will cost you three months’ interest.
  • You are limited to $30,000 in purchases of EE Bonds ($60,000 for paper issues) and $30,000 in purchases of I Bonds, per calendar year.  The purchase limits are relaxed for purposes of gifting these bonds. 
  • You can’t own U.S. Savings Bonds in your brokerage account. When the government says you buy and redeem through a “financial institution,” it was not speaking about brokerage houses.  It is only through a Treasury Direct account (linked to your bank account) or your bank itself --- so long as your bank offers savings bonds.
  • Because you don’t hold these in a brokerage account, you will not receive the benefit of reduced trading fees from a larger account balance or additional buy power.
  • You cannot pledge U.S. Savings Bonds for collateral against a bank or margin loan.
  • Tax advantages are limited.  While they are state and local tax exempt, savings bonds only offer federal tax “deferment,” not exemption.  Investors can choose to report Federal interest income annually, or defer the payment of the Federal taxes until the bonds are cashed.
  • If you buy a U.S. Savings Bond on eBay, you don’t really own it. Savings bonds are registered and so their ownership is nontransferable.  The registered owner of the bond will continue to receive the interest and redemption proceeds.  The eBay buyer owns an attractive certificate, many of which are collectibles.

Is there any good to say about U.S. Savings Bonds?  Yes, for bonds defined to be low-risk, fully-backed and with no market risk (i.e., as untraded instruments), they probably offer a fair rate.  They are a safe haven. 

Savings bonds also teach us to save for the long term.  The small denominations are perfect for young kids to become involved in savings.  The payroll deduction features spur on savings at just the right moment: when a paycheck is received.  Such programs build the habit of savings and are the foundation for an “ownership society.”--- maybe the very cornerstone.

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June 7, 2005 | Permalink

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