EE Savings Bonds
EE Savings Bonds are low-risk, U.S. government-backed
securities. EE bonds purchased on or after May 1, 2005,
earn a fixed rate of return (determined by the issue date),
while EE bonds purchased prior to May 1, 2005, have
rates based on five-year Treasury security yields and earn
a variable market-based rate of return.
These savings bonds are also exempt from state and local
taxes. If the bonds are used for paying college expenses,
they are exempt from federal taxes as well.
» How It Works
EE Savings Bonds are guaranteed by the United States
government. Rates for newly issued bonds are adjusted
each May 1 and November 1, with each new rate effective for all bonds issued in the six months following the
adjustment. The bonds increase in value every month
(as opposed to every six months like older bonds)
and interest is compounded semiannually. Rates for
EE bonds are posted on the TreasuryDirect Web site
(www.treasurydirect.gov).
EE Bonds can be redeemed one year after purchase;
however, if you redeem EE Bonds in the first five years,
you will forfeit the three most recent months’ interest.
So if you owned a bond for 24 months, you will receive
the original investment plus 21 months of interest.
The U.S. Treasury guarantees that, at a minimum, an
EE Bond will double its value after 20 years and will
continue to earn the fixed rate unless a new rate or rate
structure is announced. If a bond does not double in
value as the result of applying the fixed rate for 20 years,
the U.S. Treasury will make a one-time adjustment after
20 years to make up the difference. Series EE bonds
continue to earn interest for 30 years; after 30 years no
interest is earned.
All bonds are non-transferable. Only the owner of the
bond can cash it. Bonds that are bought as gifts must
be registered in the recipient’s name, not the buyer’s
name.
» Types
There are two main types of EE Savings Bonds: paper
and electronic.
Paper EE Bonds can be bought in denominations of
$50, $75, $100, $200, $500, $1,000, $5,000, and $10,000,
while electronic EE Bonds can be bought to the penny
for $25 or more. For example, you could buy a $50.23
bond.
The purchase price of a paper EE Bond is half of its
face value (i.e., you pay $50 for a $100 bond). The bond
will reach the full face value at maturity, with the maturity
date dependent on the interest rate. After maturity, the
bond will continue to earn interest up to 30 years. You
can redeem the bond before maturity but will get less
for the bond than the full maturity value. The closer the
bond is to maturity, the closer the bond’s market value
will be to the face value.
Electronic EE bonds are bought at full face value. For
example, a $30 bond is sold for $30. Interest is earned
on the face value, compounded semiannually for up to
30 years.
» How to Trade
You can purchase electronic EE bonds through TreasuryDirect (www.treasurydirect.gov). The site offers
24/7 access to your account and allows for automatic
purchases of as little as $25.
You can buy paper EE Bonds from many banks and
financial institutions. Paper bonds are printed based
on your specifications and are then mailed to you in
15 business days. The issue date reflects the date of
purchase so that no interest is lost. Some banks allow
you to purchase paper bonds through their Web sites
as well. Paper EE bonds purchased through a financial
institution after December 10, 2001, have the words
“Patriot Bond” printed on the top half.
If an employer offers the option, EE Bonds can be bought
through a payroll savings plan. You have the ability to
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buy paper or electronic bonds through this service.
Your purchases are limited to $30,000 each calendar year
for both paper and electronic EE Bonds.
To redeem electronic bonds, you can go to the
TreasuryDirect Web site, follow the instructions and
the redemption amount is deposited into a checking or
savings account within one business day. Paper bonds
can be cashed at most financial institutions with the
proper identification.
You can redeem up to $1,000 worth of bonds at one
time based on documentary identification alone. To
redeem more, you’ll need to sign the bonds before a
certifying officer, provide your Social Security number
and mail the bonds to the Treasury Retail Securities Site
that services your area.
Electronic bonds offer more flexibility. If you own paper
bonds, you can trade them in for electronic bonds at
TreasuryDirect using a program called Smart Exchange.
You must set up an account with TreasuryDirect to accomplish this.
» Investor Suitability
EE Savings Bonds are relatively safe investments. Many
bonds are given as gifts and used to pay for college because of the tax advantages and guaranteed return.
» Tax Consequences
Interest earned on EE Bonds is exempt from state and
local income taxes. You can defer federal income tax until
you redeem the bonds, or when they stop earning interest
after 30 years. The interest you earn is subject to federal
taxes unless the bond income is used for education. The
tax payments can be deferred until redemption, final
maturity, or other taxable disposition, whichever occurs
first. Savings bonds are subject to estate, inheritance, gift,
or other excise taxes, whether federal or state.
Special tax benefits allow you to pay no taxes when the
bond proceeds are used to pay for post-secondary education. If you qualify, you can exclude all or part of the
interest earned on the bond from your federal income
claims when the bonds are redeemed.
If a bond is reissued or the bond owner dies, tax implications can differ. Always see a tax professional in these
special circumstances. Bonds are reissued for various
reasons, most having to do with changing co-owners
and beneficiaries.
» The Pros
Guaranteed by the Government
The EE Savings Bonds are fully backed and guaranteed
by the U.S. government, making them a virtually safe
investment.
Tax Benefits
EE Savings Bonds are exempt from state and local income taxes, and if used for college tuitions, are exempt
from federal income taxes as well.
Fixed Rate of Return
EE Bonds purchased on or after May 1, 2005, earn a fixed
rate of return and increase in value every month.
» The Cons
Lower Rates of Return
The current rate for EE Bonds is 3.4% (through October
2007). Many money market and certificates of deposit
(also considered very safe investments) will pay a higher
rate.
» Additional Information
TreasuryDirect
www.treasurydirect.gov
TreasuryDirect is sponsored by the U.S. Department of
the Treasury’s Bureau of the Public Debt. TreasuryDirect
is a financial service Web site that allows investors to
purchase and redeem securities directly from the U.S.
Treasury Department in paperless electronic form. The
site also offers product information and research tools
for a variety of Treasury securities, including a Savings
Bond Calculator that allows you to find out what your
bonds are currently worth.
~By Cara Scatizzi
AAII Associate Financial Analyst
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AAII Journal