Savings Bonds

U.S. savings bonds are a type of treasury security issued by the federal government.

Series EE savings bonds. Series EE savings bonds are sold at face value in electronic form. Effective January 1, 2012, Series EE savings bonds are issued only in electronic form. Interest on the bonds is not actually paid until the bonds are cashed in. In this respect, Series EE savings bonds are very similar to most zero-coupon bonds. However, unlike zero coupon bonds, you aren't required to pay federal income tax on the interest being earned by Series EE savings bonds until you turn them in. In addition, the interest earned is exempt from state and local taxes.

Series EE bonds are issued in different denominations. The minimum purchase amount is $25 for electronic bonds.

The maturity period for Series EE savings bonds varies, as does the interest rate, based on when the bonds were purchased. However, the interest stops compounding semiannually after 30 years. Series EE savings bonds that were issued during or after May 1997 and before May 2005, earn interest based on 90 percent of the average yields on five-year treasury securities for the preceding six months. These bonds increase in value every month and interest is compounded semiannually. Their interest rate is adjusted every six months.

Series EE bonds issued on or after May 1, 2005, earn fixed rates of interest. The fixed rate applies for the 30 year life of the bond, except that a different rate may be applied for the last ten years of the 30 year term.

Series I savings bonds. Series I savings bonds are similar to Series EE savings bonds in that they are sold electronically at face value (the minimum purchase amount is $25 electronically). However, interest earnings are based on a combined fixed rate of return and semi-annual inflation rates based on the Consumer Price Index for Urban Consumers (CPI-U).

Effective January 1, 2012, Series I savings bonds are generally issued only in electronic form. A limited exception exists for Series I savings bonds purchased with an IRS tax refund.

The annual amount of Series EE and Series I bonds that individuals can purchase is $10,000 (face value).

Tip There are special tax rules for Series EE and Series I savings bonds proceeds used to pay for college tuition and fees. If you're investing in these savings bonds to pay for educational costs, you could end up not having to pay tax on part or all of the interest the bonds have earned.

Series HH savings bonds. Effective September 1, 2004, Series HH savings bonds are no longer available to the public. Before September 1, 2004, Series HH bonds were available only in exchange for Series EE bonds or by reinvesting the proceeds from Series HH bonds that had matured. You "purchased" Series HH savings bonds at face value and they pay interest at a fixed rate set on the day you got the bond. The earned interest is paid to you every six months and is subject to federal income tax in the year it is earned. However, the interest earned is not subject to state and local taxes. For those holding Series HH savings bonds, upon redemption you get back your original investment, i.e., the amount you paid for the bonds.

Like other treasuries, savings bonds have the advantage of safety and low risk on their side, as well as the deferred tax benefits available for the interest from the bonds. However, because they are a low risk investment, the interest rates they pay aren't very high.

If you're interested in investing in savings bonds, the TreasuryDirect website is an excellent source for a wealth of information. This site not only contains information about different types of bonds and the maturity, interest and tax details of each one, but you can also check the maturity dates and interest rates for bonds you already own.

You can purchase savings bonds directly from the government. You can also purchase savings bonds at banks, credit unions and other financial institutions. Some employers also offer payroll programs where deductions are made to purchase savings bonds.