U.S. savings bonds are the lowest-denomination securities issued by the Federal government. Income earned is exempt from state and local taxes. Federal taxes can be deferred for up to 30 years or until the owner cashes a bond. Both the Series EE and I bond are available at most banks and many credit unions and other financial institutions in denominations starting from $50. Many employers offer both Series EE and inflation-adjusted I Bonds through convenient payroll savings plans.
The purchase price of Series EE Bonds is one-half their face value (e.g., $50 for a $100 bond). Series I bonds are sold at face value in the same denominations as Series EE. Effective January 1, 2008, individuals or entities may purchase up to $5,000 worth of each series in paper form (a total of $10,000 in paper bonds) in one calendar year. In addition, individuals can buy up to the same amount of each series in Treasury Direct online accounts or a total of $20,000 (issue price) in single ownership form per calendar year. The accrued interest on both series is paid when the bonds are redeemed. Bonds can be redeemed at most financial institutions.
Series EE and Series I bonds must be held one year before being eligible for redemption. Redemptions prior to 5 years from issue are subject to a 3-month interest penalty (e.g., 21 months of interest for a bond cashed in after 24 months). Redemption values are available using the tables and Savings Bonds Wizard software available free at the Treasury Department Web site http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm or by consulting tables available at most banks, credit unions and other financial institutions. You may also request a free table by writing to Bureau of the Public Debt, Savings Bond Operations Office, Parkersburg, WV 26106-1328.
Effective May 1, 2005, Series EE bonds pay a fixed interest rate for the life of the bond based on whatever rate is in effect at the time of purchase. Interest rate changes are made on May 1 and November 1. Series I Bonds earn a fixed rate over and above an inflation adjustment based upon changes in the Consumer Price Index. Interest accrues federally tax-deferred for as long as 30 years or until the bond is redeemed. Earnings on both series are subject to federal tax, but may be tax-free if cashed in a year when the owner pays qualified higher education expenses. Income limits and other restrictions apply; see IRS Form 8815 for details. Earnings from all savings bonds are exempt from state and local taxes. Current rate information can be obtained by phoning 1-800-4US-BOND () or visiting the Web site www.savingsbonds.gov.
It is sometimes confusing to determine the current redemption value of Series EE bonds or when they have doubled in value. If interest rates are so low that a bond is not worth its face value in 17 years, the U.S. Treasury will add a one-time “make-up” to ensure that it is worth twice as much as an investor paid (e.g., $50 for a EE bond originally purchased for $25). Basic bond redemption tables are free and available at many banks or from the Bureau of the Public Debt, (see above). Another way to determine the value of a Series EE bond is to use the Savings Bond Wizard feature of the Treasury Department’s Web site: http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm. If your grandmother gave you a savings bond 20 years ago, for example, you can check a table or the Web site to find what it is worth.
There is also another U.S. savings bond: HH bonds. They were discontinued by the U.S. Treasury as of September 2004 but some investors still hold them. HH bonds were issued at full face value through an exchange of Series EE bonds, thus deferring federal income tax due on EE bond earnings for as long as 20 additional years. Denominations range from $500 to $10,000 and interest is paid semi-annually. The last fixed rate offered on HH bonds was 1.5% (as of January 2003).