Bonds:
U.S.
Savings Bonds - An
American Institution
When people think of saving for
college education, they think of U.S. Savings Bonds. Many parents and
grandparents buy bonds in the name of the child for their college years. The
US government issues three types of savings bonds: Series EE, Series HH and
Series I. The interest they pay is free from state and local tax, and they
are all considered risk free since they're backed by the federal government.
Series EE bonds, which you buy for half their face value and typically hold
at least until they reach full value at maturity, are probably the best
known. Series HH bonds are sold at face value and pay regular interest, but
you can't pay cash for them. You must exchange Series EE bonds to buy them.
Series I bonds are sold at face value and are indexed for inflation, which
means the interest you earn fluctuates with changes in the Consumer Price
Index (CPI).
Series EE bonds - The EE bond
is a nonnegotiable security against the credit of the U.S. Treasury. It's
nonnegotiable because once it is purchased, it can not be resold to anyone
else but the government at a fixed price. However you are permitted to
transfer the bonds to someone else by using Form PD3360 to register them in
the person's name. Keep in mind that when you transfer the bonds, all
accrued interest becomes taxable to you and you may have to pay a gift tax
if the bonds are worth more than $11,000 (amount you are allowed to give as
a gift, tax free each year to anyone). Many people buy EE
bonds via automatic payroll deduction or you can buy it at a savings bank
without commissions.
They come in denominations as small as
$50 and as large as $10,000 and you pay half the face value. For example,
you'll pay $50 for a $100 face amount. How long it will reach it's face
value depends on the interest rate it receives because the interest rate on
savings bond is adjusted twice a year, in May and November, to reflect
current market rates. The biggest difference between savings bonds and US
Treasury bills and notes is that there is no secondary market for savings
bonds since they can not be traded among investors. You buy them in your own
name or as a gift for someone else and redeem them by turning them back to
the government, usually through a bank or other financial intermediary. The
annual limit on the amount of EE bonds an individual may buy is $15,000
issue price ($30,000 face amount). This limit applies to the amount of bonds
that may be purchased in the name of any one person in any one calendar
year. Buying bonds in co-ownership form effectively doubles the limit, if
neither co-owner has purchased other bonds.
Interest on savings bonds are exempt
from all state and local income taxes, and you can choose to pay your
federal income taxes each year as the interest accrues, or postpone paying
the tax until you cash in the bond or give it to someone else, or until it
matures. The interest on it are usually tax free when putting the bond in
your child's name because the child doesn't have enough income to incur any
tax. Or the child may pay tax later but probably in the lowest tax bracket.
If you buy EE bonds in your own name, all income from them will be tax-free
if the bonds are redeemed to pay college tuition or fees, as long as your
income is under certain levels. It's very important for you to know that EE bonds
pay interest for 30 years ONLY. After that, it STOP earning interest. There
are billions of savings bonds out there that have stopped paying interest.
If you have one cash them in or exchange them for HH bonds. You should also
know that tax on the interest earned becomes reportable on your taxes in the
year the bonds reach final maturity even if you don't cash them.
Series HH Bonds - The only way
to get Series HH bonds is to exchange for your EE bonds. You can only
convert your EE to HH if all the conditions below are true:
- at least 6 months old for bonds
issued January 2003 and earlier,
- at least 12 months old for bonds
issued February 2003 and after,
- must be worth at least $500
(current redemption value) and
- must be exchanged within one
year after the bonds mature.
If the redemption value of bonds being
exchanged isn’t an even multiple of $500, you have the option of adding cash
to the transaction or receiving cash so that a multiple of $500 is reached.
For example, if you have Series EE bonds and/or notes with a redemption
value of $1,300 that you're exchanging, you can either add $200 in cash and
receive $1,500 worth of HH bonds or you can receive $200 in cash and $1,000
in HH bonds. When you convert your EE bonds, you postpone paying accrued
interest until you cash in the HHs or until they reach maturity after 20
years. But the semi-annual interest you receive on HH bonds are taxable.
Series I Bonds - I Bonds are a
new type of bond designed for investors seeking to protect the purchasing
power of their investment and earn a guaranteed real rate of return. I Bonds
are an accrual-type security--meaning interest is added to the bond monthly
and paid when the bond is cashed. I Bonds are sold at face value and they
grow in value with inflation-indexed. I bonds earn interest for up to 30
years, just like EE bonds. If you have EE bonds, you can not trade it in for
I bonds and you can not trade in I bonds for HH bonds.
For a comparison of I-bonds and EE
bonds, see the U.S. Treasury's Web page "What's
the difference between I Bonds and EE Bonds?" For more on the Series
HH bonds, visit the U.S. Treasury's
HH/H Bonds Web page.
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How do I cash in my U.S.
savings bonds?
Most full-service banks and credit unions will
cash your Series EE and Series I savings bonds. They can't cash Series HH bonds,
but can forward them to a Federal Reserve bank that will cash them for you. You
can have the funds deposited directly into your checking or savings account by
completing the
Direct Deposit Sign-Up Form (PDF 5396), which you can download here.
Series I bonds and EE
bonds purchased after February 1, 2003 must be held for one year, as opposed to
six months for bonds issued earlier, before cashing them in.
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How & Where to buy EE bonds:
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