Savings Bonds

U.S. savings bonds are one type of treasury securities issued by the federal government. There are several categories of savings bonds, but the most common savings bonds are Series EE and Series HH. Effective September 1, 2004, Series HH savings bonds are no longer available to the public.

Series EE savings bonds. Series EE savings bonds are sold at half their face value, and 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 maturity period for Series EE savings bonds varies, as does the interest rate, based on when the bonds were purchased. However, the final maturity date, in other words when the savings bonds stops earning interest, is 30 years. In addition, Series EE savings bonds issued during or after May 1997 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 on May 1 and November 1.

Series EE bonds that are issued on or after May 1, 2005, will earn fixed rates of interest. The fixed rate will apply 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. Rates for new bonds issued will be adjusted every May 1 and November 1, with each new rate effective for all bonds issued through the following six months.

Effective January 1, 2008, the annual amount of Series EE bonds that individuals can purchase is $5,000.

Tip There are special tax rules for Series EE 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. When you redeem your Series HH savings bonds, you get back your original investment, i.e., the amount you paid for the bonds.

Before September 1, 2004, Series HH savings bonds were available in denominations of $500, $1,000, $5,000 and $10,000. Series HH savings bonds have varying maturity dates depending on when they were issued, but bonds issued in January 1980 and later stop earning interest after 20 years.

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 Series EE 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, there is an excellent government site you can go to which contains 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 U.S. treasury online. 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.