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U.S. Savings Bond Benefits Explained

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 in a bond. Both the series EE and I bond are available at most banks and many credit unions and other financial institutions in denominations ranging from $50 to $10,000.

The purchase price of EE Bonds is one-half their face value (e.g.,$50 for a $100 bond). I bonds are sold at face value in the same denominations as Series EE. The accrued interest on both series is paid when the bonds are redeemed.

I bonds and EE Bonds can be purchased regularly through the U.S. Savings Bonds EasySaver™ plan, a saving program that automatically debits your bank account on a schedule that you determine. EasySaver™ information is available by calling toll-free 1-877-811-SAVE (7283) or by downloading an enrollment form from www.easysaver.gov.

The EasySaver™ Plan allows individuals to buy saving bonds for themselves or anyone they choose with a regularly scheduled deduction from a checking or saving account. An individual selects the bond denomination, the recipient, and when the bond is to be issued. Participants must purchase at least two bonds per year. The rest is automatic as bond purchases are subtracted regularly from your bank account.

Series EE and Series I Bonds must be held 6 months before they are 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 Saving Bonds Wizard software available free at the Treasury Department Web site www.savingsbonds.gov or by consulting tables available at most banks, credit unions, and other financial institutions. You can also request a free table by writing to Bureau of the Public Debt, Savings Bond Operations Office, Parkersburg, WV 26106-1328.

Series EE bonds issued since May 1997 pay an interest rate based on 90% of the average market yield of five-year Treasury securities. These rates are adjusted twice a year on May 1 and November1 based on Treasury yields during the preceding six months. I bonds earn a fixed rate over and above an inflation adjustment based upon changes in the Consumer Price Index.

Earnings on both EE bonds and I bonds 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. In 2001, to receive interest tax free, taxpayers filing a joint return must have a modified adjusted gross income below $83,650. Incomes between 83,650 and $113,650 receive partial tax relief. Joint returns above $113,650 receive no benefit. Single filers can receive tax-free interest up to $55,750 with no benefit above $70,750.

There is also another U.S. saving bond available to investors: HH bonds. HH bonds are issued at full face value through an exchange of EE bonds, thus deferring federal income tax due on EE bonds earning for up to 20 additional years. Denominations range from $500 to $10,000 and interest (currently 4%) is paid semiannually.