U.S. Savings Bond Benefits Explained

Want to save money for future goals but don’t have much money? Consider U.S. savings bonds. Many people are somewhat familiar with U.S. savings bonds. Perhaps they received some bonds for a wedding gift or their children have received bonds as gifts. At many places of employment, workers can also participate in a U.S. savings bond purchase plan and gradually purchase bonds via payroll deduction. U.S. savings bonds can also be purchased at most banks and many credit unions and other financial institutions and online from the U.S. Treasury.

U.S. savings bonds are the lowest-denomination debt securities issued by the Federal government. This makes them perfect for people who want to save money but don’t have much to save. Income earned is exempt from state and local taxes because states don’t tax the earnings on federal debt securities and the federal government doesn’t tax the earnings on state debt. Federal taxes can be deferred for up to 30 years or until the owner cashes in a savings bond. Both series EE and I savings bonds are available for purchase in denominations ranging from $50 to $10,000.

The purchase price of EE Bonds is one-half their face value (e.g., $25 for a $50 bond). Inflation-adjusted I bonds are sold at full face value (e.g., $50 for a $50 bond).in the same denominations as Series EE. Accrued interest on both types of bonds is paid when the bonds are redeemed. Series EE and Series I Bonds must be held 12 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 bonds cashed in after 24 months).

Interest can be earned on U.S. savings bonds for up to 30 years. The time that it will take for EE bonds to double to full face value depends upon prevailing interest rates during the time an investor holds them. For a rough estimate, use the “Rule of 72.” Divide the interest rate earned (the average of rates during each six month holding period) into 72 to determine how long it takes the principal to double (e.g., 72 divided by 5.4% equals 13.3 years).

The Treasury Department offers a number of support services to help Americans purchase U.S. Savings Bonds and track their value. 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.

The Savings Bond Wizard allows users to create an inventory of their bonds and automatically calculate their current value. It is available for free online and can also be purchased on a disk. The program maintains an inventory of bonds and updates their value monthly. It will also warn users if their savings bonds have stopped earning interest.

As noted above, earnings on both EE bonds and I savings bonds are subject to federal tax. They may be tax-free, however, if cashed in a year when the owner pays qualified higher education expenses. Income limits and other restrictions apply and are adjusted annually for inflation.