A savings bond is a document representing a loan you make to the U.S. Treasury Department, and the money is used to fund U.S. programs and projects. Interest is paid to you over time as the bond matures. U.S. savings bonds have been an investment option for Americans since 1935. Originally referred to as “baby bonds,” they have long been purchased as a gift to celebrate the birth of a new baby or for birthday gifts for children. You can cash the bond for the full amount on its maturity date or earlier for part of that value.
Are Bonds FDIC-Insured?
Because bonds are considered a safe investment, many people assume they are insured by the Federal Deposit Insurance Corporation, as checking and savings accounts are. Although, that’s not the case for savings bonds. According to the FDIC website, “Increasingly, institutions are also offering consumers a broad array of investment products that are not deposits, such as mutual funds, annuities, life insurance policies, stocks and bonds. Unlike the traditional checking or savings account, however, these non-deposit investment products are not insured by the FDIC.” This means bonds are not FDIC Insured.
U.S. savings bonds are, however, backed by “the full faith and credit of the U.S. government,” according to the Securities and Exchange Commission. The SEC also notes that savings bonds are considered one of the safest types of investments for this reason.
Are Savings Bonds a Good Investment?
Savings bonds can be a good option for investors who want a safe place to put their money while receiving a guaranteed interest rate. For EE Bonds issued after 2003, the Treasury guarantees the redemption value will be twice the purchase price after 20 years. You can redeem the bond at any time after the first year, but you will lose some of the earned interest if you have not held the bond for five years. Most savings bonds continue to earn interest for up to 30 years.
Interest earned is exempt from state and local income tax. Federal income tax is due when the bond is cashed in or matures, whichever comes first, although interest might also be exempt from federal income taxes if it’s used by eligible taxpayers to pay for qualified higher education expenses.
Another benefit of savings bonds, and a reason they are given to children, is that minors can have savings bonds in their names, unlike many other account types.
What Does the FDIC Insure?
FDIC-insured accounts include bank deposits, such as checking accounts, savings accounts, Negotiable Order of Withdrawal accounts, which are similar to checking accounts, money market deposit accounts, certificates of deposit, and items issued by the bank like cashier’s checks and money orders.
FDIC insurance does not cover mutual funds, stocks and bonds, annuities or municipal and government securities, including U.S. Treasury securities.
How Much Does the FDIC Insure?
The FDIC guarantee says that if you have money deposited in an insured account and the bank that holds your money fails, you will get back all of your money, including interest up to the date of the bank failure, up to the FDIC insurance limit. Each individual is covered for up to $250,000 at any given FDIC-insured bank. A joint account owned by two spouses would be covered up to $500,000. An account registered in the name of an entity, such as a trust, would have its own $250,000 limit.
Keep Reading: Who Can Legally Issue Bonds?