US Savings Bonds

There are two primary forms of US savings bonds; EE bonds and I Bonds. Here's a look at how they work.

US Savings Bonds

Savings bonds are a safe way to invest your money for a guaranteed, government-backed return. One of the primary benefits of savings bonds is that they are exempt from state and local taxes. In addition, interest is federal tax-deferred until you cash in the bond. There are two major types of US savings bonds – EE Bonds and I bonds.

EE Bonds

Series EE bonds can be purchased electronically or on paper for a minimum of $25. With electronic EE bonds you can purchase a maximum of $5,000 in bonds each year. Electronic bonds are sold at face value. So, if you pay $50 you receive a $50 bond that’s worth its full value when you redeem it.

Paper EE bonds must be purchased in certain denominations: $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. Like electronic EE bonds, there’s a $5,000 maximum purchase limit each year. Paper EE bonds are sold at half their face value. So, you would only pay $25 for a $50. The drawback is that the bond is not worth its face value until it has matured. Paper bonds are guaranteed to reach face value within 20 years.

Both paper and electronic EE savings bonds have a 3 months’ interest early redemption penalty if you redeem them within the first 5 years of purchase. If you wait until after 5 years, you won’t face a penalty.

I Bonds

I savings bonds are also called Inflation Indexed bonds. I bonds have a rate of return that’s guaranteed to be higher than the rate of inflation. They are sold both electronically and on paper. Paper bonds are available in denominations of $50, $75, $100, $200, $500, $1,000, and $5,000. Electronic bonds can be purchased in any amount from $25 to $5,000. Both types are sold at face value and have a $5,000 annual purchase limit. That means you can purchase a $5,000 bond for $5,000.

Like series EE bonds, I bonds have an early redemption penalty. If you redeem the bond within the first 5 years, your 3 most recent months of interest are forfeited. You can avoid the penalty by cashing your bond after 5 years.

Interest Rates

The U.S. Treasury announces bond interest rates on May 1 and November 1 each year. As of November 1, 2008, these are the interest rates:

  • The I Bond rate is 5.64% for bonds purchased between November 2008 and April 2009. That rate applies for the first 6 months of the bonds. After that time, the bonds will have a .70% fixed rate for the life of the bond up to 30 years.
  • The EE Bond rate is 1.30% for bonds purchased between November 2008 and April 2009. Bonds purchased from May 1997 through April 2007 earn an interest rate that’s 90% of the average 5-year Treasury securities yields for the preceding six months. Bonds purchased before May 1997 have varying interest rates depending on the date of issue.

Purchasing US Savings Bonds

To purchase a US savings bond, you must have a social security number, be a resident of the United States, or a citizen of the U.S. living abroad. All civilian employees are allowed to purchase savings bonds no matter where they live. Even minors, who are unable to purchase other securities, can purchase savings bonds.

You can purchase electronic EE and I bonds online from Treasury Direct. Paper bonds can be purchased from most financial institutions.

Using Savings Bonds to Pay for Education

If you use savings bonds to pay for you or your child’s college education, you can avoid paying taxes on the interest earned. To qualify, the bonds must be purchased by a taxpayer at least 24-years-old. If the bond is used for a child’s education, the child can be listed as the beneficiary of the bond, but cannot be listed as a co-owner. You must meet certain income requirements as defined by the IRS.