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Earn 7.12% Interest, Guaranteed and without Risk, Even Tax-Free with United States Savings Bonds! - YouTube
Channel: WCS Money Tutorials
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Welcome to WCS Money Tutorials.
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Today鈥檚 topic is United States Savings Bonds.
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Earn a guaranteed 7.12% interest rate, without
risk, which is not subject to state or local
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taxes, and may even be free of federal taxes.
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Savings bonds are issued by the United States
government.
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Interest is added to the bond at the end of
each month, much like a savings account, which
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is why they are called savings bonds.
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Savings bonds are non-marketable securities,
so they cannot be sold.
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Instead, both the principal and interest are
paid at maturity or when the bond is redeemed.
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The maximum term is 30 years.
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Thereafter, no additional interest is earned.
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They can be purchased commission-free at TreasuryDirect.gov.
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There are two types of savings bonds: Series
I and Series EE.
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Series EE bonds pay a fixed, low rate of interest.
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Series I bonds pays an interest rate that
is part fixed and part variable.
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Currently, the fixed portion is 0%, so there
is only a variable portion.
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In November 2021, the interest rate for Series
I bonds was 7.12% and the Series EE bonds
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paid 0.1%, a difference of 7.02%.
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The interest rate for I Bonds is adjusted
for inflation in May and November.
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The current rate is guaranteed until April
2022.
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In addition to the low interest rate, series
EE bonds have no advantages over I bonds,
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so there is no reason ever to purchase them.
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I will not discuss anything more about the
EE bonds, but, if you want to learn more,
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TreasuryDirect has more information about
EE bonds.
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You can buy bonds commission-free at TreasuryDirect.gov.
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Select the tab for Individuals.
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Select Series I
This screen shows more information about I bonds.
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The list of links on the left side include
the links to Buy and Redeem.
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As stated earlier, bonds cannot be sold.
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Instead, they are redeemed by the federal
government.
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Bonds must be held for a minimum of 1 year.
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If redeemed before 5 years, then the last
3 months of interest is forfeited.
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However, this penalty can be mitigated by
buying right before the end of the month and
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selling right after the beginning of the month,
since you earn a full month of interest if
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you owned the bond for any portion of the
month.
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The best way to buy bonds is through TreasuryDirect,
which is managed by the federal government
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and charges no commissions.
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There are some restrictions as to who can
own a bond, you can see the details in this
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page, but most adult Americans qualify.
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However, children may not open an account
directly.
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A parent or guardian must open the account
for them.
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Once the account is opened, then parents or
other adults can buy bonds for the child.
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The amount of bonds you may purchase is limited
annually, up to $10,000 for electronic bonds
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and up to $5000 for paper bonds.
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Registering the bond determines who owns a
bond and who can redeem it.
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The owner can also specify a beneficiary who
will receive the bond if the owner dies.
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Adults can buy savings bonds for children
younger than 18.
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Paper bonds can also be bought for children,
in which case, the adult will not be responsible
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for the taxes on the bond.
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If the bond proceeds are for a child鈥檚 education,
then one or both parents must own the bond.
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The child may be a beneficiary, but not a
co-owner.
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Bonds are not subject to either state or local
taxes.
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Bonds are normally taxable by the federal
government, but there are ways to minimize
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or even avoid federal taxes.
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Taxes can be saved for children even if the
proceeds are not used to pay for educational
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expenses.
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By putting the bonds in the child鈥檚 name
only and filing a tax return for the child
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and electing to report the interest annually,
the child鈥檚 tax rate will apply to the child鈥檚
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income, so if it is less than the standard
deduction for children with investment income,
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which is equal to the greater of $1100 or
earned income + $300, then no return needs
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to be filed for the child.
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When the bond matures, the child receives
the proceeds tax-free.
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However, if the child receives significant
income, then kiddie tax rules may apply.
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In this case taxes on the interest may be
deferred until the bonds are redeemed, when
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the interest will be taxed at the child鈥檚
rate if he is at least 19 years old, or 24
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years old if she is a full-time student.
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Redemptions for younger children will be subject
to the kiddie tax rules.
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Further tax savings may be possible if the
proceeds are used to pay for education.
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However, there are certain requirements that
must be met before qualifying for this tax-free
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treatment.
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The tax savings for the educational bond program
is limited by income, specifically modified
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adjusted gross income or MAGI.
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MAGI = taxable income + additional income
that would otherwise be excluded or deducted
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when calculating normal tax liability.
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For instance, IRA deductions would have to
be added back to taxable income to determine
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MAGI.
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The income limitations phase out slowly, over
an income of $15,000 or $30,000 for couples
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married filing jointly.
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The 2021 threshold for most taxpayers is $83,200
and the limit is $98,200.
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For married filing jointly, the limits are
higher, as seen in this screen.
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The MAGI limits depend on when bonds are redeemed,
not when they are purchased.
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This screen shows the formula and an example
for calculating the tax-free portions of bond
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redemptions if MAGI exceeds the threshold,
but is still below the phaseout amount.
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There are also some redemption requirements,
the primary requirement being that the educational
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expenses must be incurred in the same tax
year the bonds are redeemed.
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Only certain educational expenses qualify,
including tuition and fees and other required
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course expenses, but does not include books
or living expenses.
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This screen shows both a formula and 2 examples
on how to calculate the tax-free portion of
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redemptions when not all of the bond proceeds
are used to pay for educational expenses.
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You can also give bonds as gifts.
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To give an electronic bond as a gift, you
must know the recipients full name, Social
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Security or taxpayer identification number,
and their TreasuryDirect account number.
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You deliver your gifts with the TreasuryDirect
tools for giving gifts.
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Here you can see the screen for the delivery
request details.
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This is the details screen for the delivery
request.
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You can get more information on giving gifts
from TreasuryDirect.
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Thank you very much for your time.
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If you liked my video, please SUBSCRIBE!
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leave them in the comments below.
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Check out my website at https://thismatter.com
for more than 850 in-depth fundamental tutorials
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on personal finance, investments, and economics.
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Check out my books on money at https://williamspaulding.com.
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Thank you.
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