Series I Bonds

Series EE Bonds

Basics: Series I Savings Bonds are inflation-protected securities that earn interest for up to 30 years or until you redeem them, whichever comes first. You can redeem I Bonds for cash any time 12 months or more after you buy them. However if you redeem within five years, the government charges a penalty equal to three months interest.

Tax Advantages: If you're a cash-method taxpayer, you owe no federal income tax on accrued I Bond interest until the year the bonds mature or the year you redeem them. So you can postpone federal income tax for up to 30 years. Alternatively, you can choose to report the interest that accrues each year on your tax return (usually that only makes sense for children and others who pay very low or zero percent federal income tax).

I Bond interest is exempt from state income taxes, which is a nice bonus in this era of increasing state tax rates. 

How to Buy I Bonds

You can buy paper I Bonds at face value in $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000 denominations. Or you can buy electronic I Bonds at face value at www.savingsbonds.gov for a minimum $25 investment.

Because I Bonds are intended for small investors, there are limits:

• You can buy up to $5,000 of paper I Bonds for yourself each year.
• You can buy up another $5,000 of electronic I Bonds for yourself each year.
• If you're married, the same limits apply separately to your spouse.
• You can also buy up to another $5,000 of paper I Bonds and up to another $5,000 of electronic I Bonds each year for another individual, such as a child or grandchild. So can your spouse.

I Bonds pay interest that is made up of two separate rates:

1. A fixed rate, which is determined upon issuance and that applies for the entire 30-year life of the I Bond.

2. A variable rate, which is based on the current inflation rate. The variable rate is re-set twice a year.

• For I Bonds issued between May 1 and October 31, 2011, the fixed rate is zero percent. That sounds unacceptable until you remember that most money market funds and shorter-term CDs are currently paying microscopic rates. So they are basically paying close to zero percent too.
• The current six-month variable rate for I Bonds is 2.30 percent. That equates to an annual 4.60 percent rate. The six-month variable rate will be reset on November 1, 2011 and every six months after that.
• The fixed rate is combined with the variable rate to determine the overall I Bond interest rate paid each six-month period. Interest accrues monthly and compounds every six months. So the current overall interest rate equates to a 4.60 percent annual rate.

Basics: Series EE Savings Bonds have been around longer than I Bonds, which were introduced in 1998. EE bonds came into existence in 1980, replacing E bonds, which had been around since 1941.

Unlike I Bonds, the interest on EE Bonds is fixed rather than inflation-protected. Like I Bonds, EE Bonds earn interest for up to 30 years or until redemption, and they can be redeemed for cash any time 12 months or more after the purchase date.

Also like Series I Bonds, redeeming EE Bonds within five years results in a penalty equal to three months interest.

Tax Advantages: Interest paid by EE Bonds receives the same favorable tax treatment as interest paid by I Bonds.

How to Buy EE Bonds

You can buy paper EE Bonds for half of face value in $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000 denominations. For example, you would pay $100 for a paper EE Bond with a $200 face value.

You can also buy electronic EE Bonds for face value at www.savingsbonds.gov with a minimum $25 investment. Both paper and electronic EE Bonds are subject to the same annual purchase limits as I Bonds.

Who Can Own EE Bonds?

Individuals, corporations, associations, public or private organizations, and fiduciaries can own paper Series EE bonds. Individuals and various types of entities including trusts, estates, corporations, partnerships and others can own electronic savings bonds.

Double-Your-Money Guarantee

EE Bonds issued between May 1, 2011 and October 31, 2011 pay a fixed annual interest rate of 1.10 percent for up to 30 years. However if you hold your EE Bonds for 20 years, the government promises to pay enough extra interest to double your money.

For example, a paper EE Bond purchased for $5,000 is guaranteed to be worth $10,000 after 20 years, and an electronic EE Bond purchased for $5,000 is also guaranteed to be worth $10,000 after 20 years.