Investment Bonds vs Education Bonds – What’s the difference? (2024)

FAQs

Investment Bonds vs Education Bonds – What’s the difference? ›

It can be for yourself but most people use an Education Bond to invest in the future of their children or grandchildren. Offering all the features of an Investment Bond, an Education Bond also has special Education Tax Benefits, Estate Planning features and the discretion to appoint multiple Beneficiaries.

An education savings bond program lets taxpayers exempt some or all of the interest earned upon redemption of eligible savings bonds from their annual gross income. 1. The bond owner must be at least 24 years of age when the bond is purchased for it to qualify for this program.

Again, like superannuation, investment bonds are a tax paid investment. This means that earnings are taxed within the fund, they don't form part of your personal tax return. This can be beneficial if you don't want the hassle of tracking and reporting income and capital gains yourself.

Should You Buy Investment Grade Bonds? Investment grade bonds can provide reliable cash flows with relatively low levels of risk, making them a good fit for conservative investors, income investors and retirees looking to balance out their portfolios.

If the investment bond is held for 10 years or more, there is no additional tax payable on the investment earnings. This is called the 10-year rule.

Using Series I bonds for college savings

The federal government allows qualified holders of Series I bonds – and Series EE bonds, too – to exclude from their income any interest paid when the bonds are cashed as long as the bond owner pays qualified education expenses at an eligible educational institution.

Different bond types—government, corporate, or municipal—have unique characteristics influencing their risk and return profile. Understanding how they differ and the relationship between the prices of bond securities and market interest rates is crucial before investing.

An investment bond gives you the potential for medium to long-term growth on your money, over 5-10 years or more, along with fund management expertise. You also get access to a mixture of funds, which are looked after by professional investment managers.

Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for federal tax purposes.

What happens to investment grade bonds when interest rates rise? ›

When interest rates rise, prices of existing bonds tend to fall, even though the coupon rates remain constant, and yields go up. Conversely, when interest rates fall, prices of existing bonds tend to rise, their coupon remains constant – and yields go down.

U.S. Treasuries are considered among the safest available investments because of the very low risk of default. Unfortunately, this also means they have among the lowest yields, even if interest income from Treasuries is generally exempt from local and state income taxes.

Is now a good time to buy bonds? Many investors have been reluctant to hold bonds for years due to the low interest rate environment, but that should no longer be the case, says Collin Martin, fixed income strategist at Charles Schwab.

A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.

Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.

125% rule – additional investments

Most bond providers allow additional amounts to be invested each year. Provided such amounts do not exceed 1.25 times the previous year's deposits (the 125% rule), the additional contributions have the same start date as the original investment for calculating the 10 year term.

A very common way a school district may borrow money is to issue a bond which works like a loan and ask tax payers for a Bond Levy, or an increase in property taxes. The increased amount of taxes pays back lenders or bond holders and the interest on the loan.

The ability to get the exclusion ends if modified adjusted gross income is above certain limits (in 2022, it was $100,800 for singles or $158,650 for married couples filing jointly). I bonds have other restrictions. No withdrawals are allowed in the first year of ownership.

The interest on EE bonds isn't taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn't made so bond holders receive the benefits of tax deferral.

Reporting the interest every year

For example, you may find it advantageous to report interest every year on savings bonds in a child's name. The child may be paying taxes at a lower rate than will be true years later when the bond matures. But you will not get a 1099-INT every year.