investing

5 common questions about savings bonds

1. Why should I buy U.S. savings bonds?

Buying U.S. savings bonds is patriotic; when you lend money to Uncle Sam, you're helping to finance the country's borrowing needs. It's good for America, and it's good for Americans, too. Here's why:

  • U.S. savings bonds are very safe:They are backed by the full faith and credit of the U.S. government. When you spend $500 to buy a bond, it will never be worth less than $500.
  • Interest rates are competitive: Series I and Series EE offer competitive rates. Check the Bureau of the Public Debt Web page for current rates. For comparisons, visit Bankrate.com for up-to-the-minute rates on money market accounts and CDs. Series EE and Series I rates change twice a year, in May and November.
  • There are tax breaks: You won't pay state or local income tax on the interest your bonds earn. For federal tax purposes, interest compounds tax-deferred until the bonds are redeemed.
  • If you use the bonds to pay for college, the interest could be tax-exempt: Check Bankrate.com's tip on the tax advantage of using savings bonds to pay higher-education expenses.
  • Series EE and Series I savings bonds are easy to buy: Employers offer them through payroll savings plans, and most banks and credit unions sell them. The U.S. Department of the Treasury lets you buy them directly through their TreasuryDirect Web site. When you open an account through TreasuryDirect, you can authorize automatic deductions from your checking or savings account and, soon, you'll be able to set up electronic payroll savings.

2. What types of U.S. savings bonds can I buy?

There are two series of U.S. savings bonds you can buy (Series I and EE). You may have heard about Series E and Series HH/H bonds; the E bonds were superseded by the Series EE and the HH/H bonds are no longer available.

  • Series I: Introduced in 1998 to encourage Americans to save, this bond pays an attractive interest rate, and is indexed for inflation, based on the Consumer Price Index for all urban consumers (CPI-U). This is the Diva's favorite savings bond; read more about why in " Shopping for I bonds." Interest compounds, tax-deferred, until the bond is redeemed.
  • Series EE: This bond is a fixed-rate bond with the new rate based on the 10-year Treasury average for the preceding month with adjustments for features such as tax deferral.. Series EE bonds usually pay a lower interest rate than I bonds, but like I bonds, interest compounds, tax-deferred, until the bond is redeemed.
  • Series HH: This bond provides current income; interest payments are made by direct deposit to the bondholder's checking or savings account every six months. You couldn't buy Series HH bonds; you could only get them in exchange for Series EE/E bonds and savings notes or by reinvesting the proceeds of matured Series H bonds. Interest rates are reset on the 10th anniversary of the HH bond's issue date. But, the last issue month for the Series HH/H savings bonds was September 1, 2004.

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.

3. How much can I buy or exchange?

  • Series I:Bonds are issued at face value; $100 buys a $100 Series I bond. Annual purchase limit per Social Security number is $30,000.
  • Series EE: Bonds are issued at 50 percent of face value; $50 buys a $100 Series EE bond. Annual purchase limit per person is $15,000 issue price ($30,000 face value).

4. How can my employer set up a savings plan for employees to purchase U.S. savings bonds out of payroll deductions?

The U.S. Treasury Bureau has designated four Federal Reserve banks to serve as "Savings Bond Processing Sites." They help employers set up payroll savings plans for U.S. savings bonds. The Bureau of Public Debt Web site has a map showing the four districts and the states they serve. It also provides a phone number and e-mail address for each district.

5. 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.

For the nitty-gritty on redeeming your bonds, read the Diva's " Rules for cashing in U.S. savings bonds."

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-- Updated: Aug. 22, 2006

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