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Treasury Savings Bonds

I Bonds

I Bonds are 30-year variable rate, inflation adjusted debt obligations of the federal government. I Bonds are a tax deferred, secure, semi-liquid, inflation protected savings vehicle. The interest rate paid is a blended rate, consisting of a base fixed rate that remains constant until maturity and a consumer price indexed rate (CPI ĖU) that changes semiannually each May & November.

Interest is paid at maturity.

I Bonds are sold at face value, in denominations of: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. $25 bonds are available if purchased through Treasury Direct. Purchases are limited to $30,000 annually.

The bond could be redeemed any time after a 12 month holding period. There is an interest penalty if sold too soon. I Bonds sold within 5 years of purchase will forfeit their most recent 3 months of interest. There is no penalty after 5 years. You need to keep track of the purchase date, because interest stops accruing after 30 years.

For income taxes purposes, you have a choice as to when to declare the interest income. Most tax payers report on the cash basis; when the government pays you, the tax is due. Bondholders are also allowed to accrue the interest earned annually on their tax returns. Civic-minded investors may prefer the early payment of taxes to help reduce the current budget deficit. If the bonds are sold to pay qualifying higher education expenses, the interest may be exempt from federal income taxes. IRS publication 970 contains the details.

I Bonds can be replaced if lost, stolen or destroyed. Itís important to remember to keep a log of purchased bonds (physically located separately from the actual bonds), including the serial numbers, amounts, issue dates and social security numbers. This information is needed for the bonds to be voided and re-issued. The same holds true for travelerís checks.

I Bonds are excellent investments! They pay a competitive interest rate and they offer a hedge against inflation. They also make great gifts!

EE / E Bonds

EE Bonds are a good savings vehicle and are offered in electronic (Treasury Direct) or paper form. They are secure, pay a competitive positive interest rate, are semi liquid, and interest income is tax deferred. They also have education related tax breaks.

EE Bonds issued after 5/1/05 earn a fixed rate of interest that will apply for the 30 year life of the bond. EE Bonds will increase in value every month; interest compounds semiannually. The Treasury guarantees that a bondís value will double after 20 years. At maturity, after 30 years, interest stops accruing. Each bond also contains a 10 year extended maturity period where new rates and structures can be applied.

Interest rates for new issues are updated every May and November.

When purchasing these bonds electronically through Treasury Direct, they are sold at face value. For example, you pay $25 for a $25 bond. However, when you purchase the paper EE bond certificates through a financial institution or through a payroll savings plan they are sold at half their face value. For example you pay $25 for a $50 face value bond. The paper bonds are sent to you via the US post office. Issue prices for electronic savings bonds start at $25, while those for paper bonds start at $50 face value.

The bonds are redeemable any time after 12 months. If you sell the bonds within the first 5 years of purchase, there is a 3 month forfeiture of interest penalty.

EE Bonds make good gifts and are great for birthdays, anniversaries, and other special events. Their 30 year life makes them excellent investments for long-term goals, like college and retirement savings.

HH / H Bonds

HH /H Bonds are no longer available for purchase. The critical issue seems to be: how long can you hold these bonds and still earn interest?

        H Bonds issued through December 1979 : 30 years

        HH Bonds issued January 1980 through 2004: 20 years

 

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