Savings bonds are long-term investment instruments offered by the United States Treasury Department. These bonds are considered extremely low-risk and are very safe investments because they are backed by the full faith and credit of the U.S. government. Additionally, the low cost of these investments make it possible for the average person to purchase these debt instruments.
Funds received by the Treasury Department in exchange for a bond are essentially loans to the U.S. government. Therefore, bondholders are entitled to the full repayment of the original amounts paid plus applicable interest. Currently, there are only two types of U.S. savings bonds available for purchase – Series EE and Series I.
Series EE Savings Bonds/ Patriot Bonds
Series EE savings bonds (also known as Patriot Bonds) are investments that continually increase in value until it is cashed in or reaches its final maturity 30 years after the issue date. Series EE bonds issued after May 1, 2005 earn interest only at a fixed rate determined at the time of purchase. At minimum, the U.S. Treasury guarantees that Series EE bond values will double after 20 years. Bond interest accrues monthly and is compounded semiannually.
Series I Savings Bonds
Series I savings bonds are also investments that will continue to increase in value until it is redeemed or until it reaches its final maturity 30 years after the issue date. Series I bonds earn interest at fixed rates and, unlike Series EE bonds, also include a variable inflation-indexed interest rate component. The fixed rate and the variable inflation-indexed rate are referred to as the “composite rate.”
Note that the variable inflation-indexed rate is based on the Consumer Price Index for all Urban Consumers (CPI-U) and that it can actually be a negative rate during deflationary periods. However, it is important to understand that the composite rate will never drop below 0.00% during instances when a negative variable interest rate completely offsets the fixed interest rate.
Current Savings Bond Interest Rates
- Series EE – The current fixed interest rate for Series EE bonds issued between May 1, 2009 and October 31st, 2009 is .70%.
- Series I – The current fixed interest rate for Series I bonds issued between May 1, 2009 and October 31, 2009 is .10% and the variable indexed inflated rate is -2.78%; therefore, making the composite rate 0.00%
Buying Savings Bonds
Both Series EE and Series I bonds can be purchased in either paper or electronic format. In general, the annual limit per calendar year per investor is $5,000 per each series in each format ($20,000 in total).
- Paper Bond Method – Paper bonds are most commonly purchased at financial institutions or through employer payroll savings plans. Series EE paper bonds can be purchased in 8 denominations- $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. They are purchased for 50% of their face value (for example, a $100 EE bond costs $50). Series I bonds paper bonds are offered in 7 denominations- $50, $75, $100, $200, $500, $1,000, $5,000. They are purchased at their face value (for example, a $100 I bond costs $100).
- Electronic Bond Method - Electronic bonds are purchased online via TreasuryDirect.gov. A potential investor must setup a TreasuryDirect.gov account prior to purchasing bonds via this method. All bonds are purchased at face value in any amount over $25 including penny increments.
- Tax Return Refund Bond Conversion Method - Effective with 2009 tax returns filed in 2010, there is an option to automatically convert a portion or all of a refund into a savings bond.
Taxability of Savings Bonds
Interest earned on Series EE and Series I bonds are subject to federal taxes but are exempt from state and local taxes. However, there are certain exemptions available from federal taxes if the proceeds of the bond are used for educational purposes.
Resources:
Treasury Department Website
The information contained within this article is for general guidance only. As such, it should not be used as a substitute for consulting with professional accounting, tax, legal or other competent advisors.
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