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Important Facts About Saving Bonds
By Joe Goertz
Unlike traditional bonds, saving bonds are not subject to the ups and downs of the stock market. Savings bonds are low risk, government-backed bonds with guaranteed rates of interest. There is a tax advantage to savings bonds because the owner may be able to partially or completely exclude their interest from Federal income tax.
There are three types of saving bonds: I, EE/E and HH/H. They are issued by the US Treasury Department. They can only be purchased in one of three ways: 1) through authorized financial agencies, such as a bank; 2) through payroll deductions; and 3) through an electronic service called TreasuryDirect. All saving bonds are registered and held in name of the person who owns them. Savings bonds are registered securities. They can be replaced if they are lost or destroyed.
Series I bonds are available at face value only. Series I bonds come in $50 to $10,000 denominations. No more than $30,000 (face value) of paper bonds and $30,000 of electronic bonds purchased each year. They must be held for a minimum of 1 year and they will accrue interest for 30 years. Interest on the Series I bonds is based on a fixed rate (announced by the Bureau of Public Debt in May of each year) and an annual inflation rate (announced in November of each year).
Interest is paid when the bond is redeemed. If this happens before the bond is five years old, there is an interest penalty equivalent to the three most recent month’s interest. Interest is not subject to State and local taxes. It is, however, subject to State and local estate, gift and other excise taxes. Interest on the bonds is also subject to Federal taxes. If the bonds are used to finance an education, all the interest or only part may be excluded from federal income taxes.
The series EE bonds replaced Series E. EE bonds are very affordable and can be purchased at one half of their face value. They come in denominations from $50 to $10,000. Individuals can buy no more than $30,000 (face value) worth of paper bonds and $30,000 of electronic bonds annually. EE bonds purchased between May 1997 and April 30, 2005 earn a variable market-based rate of return. Those issued May 2005 onwards earn a fixed rate of interest. They will generate interest for 30 years and the interest is compounded semi-annually. The Series EE bonds are similar to the Series I Bonds in regard to interest payment and time of redemption. The biggest difference between EE and I bonds is that interest rates are figured differently. EE Bonds receive 90% of 6-month averages of 5-year Treasury Securities market yields.
Prior to September 2004, Series HH savings bonds could be purchased only in exchange for Series EE/E bonds. After that date, they could be purchased without them. Series HH bonds are available in denominations ranging from $500 to $10,000. They are purchased at their face value. There is no limit on the amount that can be purchased.
The interest on Series HH bonds is fixed on the date of purchase and will continue to accrue for 20 years. The interest is deposited directly into the owner’s checking or savings account. Series HH Savings Bonds must be held for a minimum of six months. Like Series I and EE, the interest on Series HH bonds is not subject to State and local taxes. It is, however, subject and State and local inheritance, gift and other excise taxes.
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