Tips on Government Bonds

Consider Your Options

• Investors and analysts often talk about bonds as if they're a single type of investment. But in fact government bonds come in several different forms that each have advantages and drawbacks. Treasury bonds have a fixed 30-year term but pay interest twice a year for the duration of the time you own the bond. Savings bonds are another option and come in several varieties. Series I bonds are available for face value but earn interest and protect your money from inflation. Series E and EE bonds cost only half of their face value and mature within 30 years based on interest rates elsewhere in the economy, eventually reaching and surpassing their face value. While savings bonds cost as little as $25, treasury bonds start as $1,000. Consider how long you can wait and how much you have to invest before jumping into the bond market.
  
  

Consider Your Taxes

• When you buy government savings bonds you earn money as the bond gains value, but you don't need to pay tax on that money until you sell the bond. At that time, you're responsible for investment income tax on the amount of value the bond gained while you owned it. You can choose when to sell your bonds based on your tax situation to help minimize this tax. For example, if you wait until retirement to cash in savings bonds, you'll likely fall into a lower tax bracket than you did while you were working and pay a lower tax rate on your bond interest. Whenever you sell, make sure you set aside some of your bond proceeds to pay the tax at the end of the year.
  
  

Be Patient

• Government bonds are, by their very nature, long-term investments. Even treasury bonds, which can mature in a few days, stand a much better chance of gaining more value over the long term. If you need quick cash, consider dipping into your savings account first since bank interest is usually below the interest rate of a government bond. If interest rates fall and your bond gains value more slowly, the decision to sell means you won't be able to take advantage of rapid gains once interest rates rise with the next economic cycle.
  
  

Diversity

• Bonds are one of the safest forms of investing. Government bonds rely on the government's ability to pay bond owners in the future, and as long as the government has money at its disposal you'll be guaranteed a profit. However, government bonds also limit how much you can earn. More volatile investments, such as stocks, are more risky but can result in bigger gains. The best investment strategy for most people includes a combination of safe, fixed income investments (such as bonds) and riskier investments (such as stocks).