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Course 110
U.S. Savings Bonds


Remember when you were growing up and a favorite aunt regularly gave you a savings bond for your college education? Or maybe you received a savings bond as a school prize for winning a debate or an essay contest. Savings bonds were a good investment a few years back. They still are, even though it is easy to lose sight of their tried and true benefits in the current economy, where almost everyone seems to be investing in the stock market--either through a broker, via their mutual funds or 401(k) plans, or online.

Let's start with the most fundamental question: What exactly is a savings bond?

What Are Savings Bonds?

Occasionally, you may come across an old movie or poster that portrays a World War II bond drive or urges citizens to "Buy bonds!" The United States established savings bonds, known then as "war bonds," in 1941 to help pay for the huge expenses it would incur during World War II. Today, savings bonds still help keep the government wheels running smoothly.

Savings bonds are a debt instrument of the U.S. government, issued as savings certificates to individual investors in small amounts. Savings bond certificates bear face value denominations ranging from $50 to $10,000.

Since they are backed by the full faith and credit of the federal government, savings bonds are among the safest investments you can find. The U.S. government is unlikely to default; and even if you lose your savings bond certificate, the government will often replace it--especially if you can provide such information as the serial number, issuance date, and address and Social Security number of the owner.

Another major advantage of savings bonds is that they are an accessible investment for almost anyone, since you can buy savings bonds in amounts as low as $25. For instance, you can buy a $50 Series EE bond for $25, and at maturity, you can redeem it for $50. As a result, savings bonds still make good gifts for children planning to attend a college or technical school.

That's not all. Savings bonds have at least two more advantages. They can provide a tax shelter--you don't pay income tax on the earnings of Series EE bonds until you redeem them. In addition, savings bonds are easy to acquire from a variety of sources.

Besides offering several tax advantages, savings bonds can provide a reasonable, inflation-indexed return and a steady investment vehicle for the long term--not to mention the safety and backing of a U.S. government-issued security.

Where Can You Buy Savings Bonds?

While you still cannot buy savings bonds at the corner convenience store, you can purchase them in a wide variety of places. Savings bonds are sometimes available through a payroll deduction plan at work. You also may purchase them at a variety of government offices and financial institutions:

  • Banks
  • Credit unions
  • Federal Reserve banks and branches--by phone or mail only. The Federal Reserve no longer provides a walk-in service.
  • Bureau of Public Debt--for more information or to buy bonds online, visit (You even can set up a program of regular deductions via electronic transfer from your checking account.)

If you lose a savings bond, you can request Form PDF 1048 from a participating financial institution or Federal Reserve Bank. Provide as much information as you can--such as the lost bond's serial number and issuance date as well as the owner's name, address, and Social Security number. When you have completed the form, mail it to:

Division of Transactions and Rulings
Bureau of Public Debt
P.O. Box 1328
Parkersburg, WV 26106-1328

Besides being extremely easy to acquire, a savings bond offers another attractive purchasing feature: no seller's fees. Unlike stock purchases, there are no fees or commissions that add to the purchase price.

What Types of Savings Bonds Are Available?

There are three types of U.S. savings bonds today, distinguished by the ways in which they pay interest.

If you bought or received a savings bond before 1980, you would have owned a Series E or Series H savings bond. That year, Series EE and Series HH bonds replaced the original series. The two current series offer different maturities and interest rates. In 1998, the U.S. government introduced inflation-indexed Series I bonds.

Savings bonds offer people with limited resources a way to begin an investment program. The U.S. government issues Series EE bonds at one half their face value, which ranges from $50 to $10,000. At maturity, you can redeem the bonds at their face value. You may buy up to a face value maximum of $30,000 in Series EE bonds annually. Series EE bonds earn interest for 30 years.

Series HH bonds earn interest for 20 years. You were able to acquire Series HH bonds only through an exchange of your Series E or Series EE bonds; however, as of September 2004, HH/H series bonds are no longer available for purchase. Existing bonds have denominations of $500, $1,000, $5,000, and $10,000. Unlike Series EE bonds, Series HH bonds were acquired at their full face values and thereafter receive regular interest payments.

Series I bonds also are sold at their full face values, beginning with a minimum denomination of $50. Other denominations are $75, $100, $200, $500, $1,000, $5,000, and $10,000. Like Series EE bonds, you receive the interest earned when you cash the bond. I bonds earn interest for 30 years.

You can use all types of savings bonds in several ways --for example, as a regular savings program through payroll deductions and as a very safe instrument that provides stability to your investment portfolio. Because of the low minimum investment requirements, they also offer people with limited resources a way to begin an investment program.

How Much Money Do Savings Bonds Earn?

The bottom line for returns on savings bonds sounds like the fable about the tortoise and the hare: slow and steady wins the race. Backed by the U.S. government, savings bonds are extremely safe. But a tradeoff for that safety is a relatively low rate of return.

The current interest rate on Series EE bonds is 1.30%, through April 30,2009. New interest rates are announced twice a year and take effect May 1 and November 1. If held for five years, Series EE bonds pay 90% of the six-month average yield on five-year Treasury securities. Earnings vary for Series EE bonds issued from 1980 to 1997, so consult your financial institution or the Bureau of Public Debt for exact figures. Many Series E bonds have stopped paying interest. You receive the interest earned along with your principal when you cash in the bond.

Series HH bonds pay a fixed rate of interest from the date you purchase the bonds. The present rate is 1.5% and has been in effect since January 1, 2003. You receive interest payments on your HH bonds twice a year. Note: Series HH/H bonds will no longer be for sale or exchange after August, 2004.

Series I bonds bought from November 1, 2008 through April 30, 2009 will earn 5.64% interest for the first six months. The rate is a combination of a fixed rate of 0.7% (fixed for the life of the bond) plus an adjustable rate (adjusted six months) based on inflation. You receive the interest earned along with your principal when you cash in the bond. The federal government developed Series I bonds to assure investors a rate of return above inflation. Historically, some savings bonds have, in reality, lost purchasing power during periods of high inflation.

For current U.S. savings bond rates, go to

How Do You Redeem Savings Bonds?

While savings bonds are intended to be long-term investments, eventually the time will come when you want to redeem them. Maybe you need the money to return to school, for a long-awaited retirement cruise, or for a hundred and one other reasons. Generally, the easiest way to redeem savings bonds is through your local bank, credit union, or other financial institution, although you also can contact the U.S. Bureau of Public Debt or the nearest Federal Reserve Bank.

Redeeming savings bonds at your local financial institution is a simple and straightforward process. If you are not a regular customer or member, you may have to show your driver's license or other identification. If you are not the owner of the bonds, you will also have to establish that you're entitled to cash them. For example, you may be listed as a beneficiary on the bonds of someone who has died and in addition can provide a death certificate of the former bond owner. You also can cash bonds for your children. In some cases, the request to cash a bond may have to be sent to a Federal Reserve Bank; your financial institution can help process this request.

You can redeem your bonds for their full value, unless you have held them for less than five years. In that case, there is a penalty equaling three months' interest. For example, if you redeemed a Series EE bond that you had held for two years, you would receive interest for 21 months--not 24 months. Note: Series HH/H bonds have not been available for sale or exchange since August 2004.

What Taxes Apply to Earnings from Savings Bonds?

While savings bonds do not earn high interest, the low interest rate is sometimes compensated by favorable tax terms. Remember, you can use the money you do not spend on taxes to purchase an item you want or to invest in other instruments.

What specifically are the tax advantages? For starters, you do not pay any state or local taxes on the earnings of any savings bonds you own--ever. While you must pay federal taxes on the earnings of Series HH bonds in the year that you receive the interest, you can defer earnings and taxes on Series E, EE, and I bonds for long periods.

Remember, you can hold Series EE and I bonds for 30 years. After that period, you can exchange Series EE bonds for Series HH bonds and then hold them for another 20 years. After 20 years, you must redeem the HH bonds and finally pay any taxes owed on the earnings from the old EE bonds. Note: Series HH/H bonds have no longer been available for sale or exchange since August 2004.

If you buy Series EE or Series I bonds in the name of your child and redeem the bonds while the child is still your dependent, you will pay taxes on the earnings at the child's rate. The child's rate may be 0% if the child's total income is $850 or less; in any case, it is probably less than your tax rate.

In 1990, the Treasury department established the Education Bond Program, which exempts savings bond earnings from federal tax if the bonds are redeemed to pay for qualified education expenses. To qualify for this program, you must be 24 or older when buying the bonds. You then must redeem your bonds and document tuition and certain other education-related expenses (room, board, and books are not qualified). If the value of the bonds redeemed is greater than the qualified expenses, only the proportion used for qualified expenses is tax-free.

The full exclusion is also only available to single taxpayers with annual income below $78,100 and married persons filing jointly with income below $124,700. Within these limits, the exclusion is gradually phased out. You can find more information about the program at the Savings Bonds for Education web site.

The tax advantages of savings bonds can offset their generally low returns, so that savings bonds can form a valuable portion of your investment portfolio.

Savings Bonds Have Been American Favorites for Decades

There can be many advantages to Old Aunt Agatha's practice of giving all of her nieces and nephews savings bonds each year. Besides offering several tax advantages, savings bonds can provide a reasonable, inflation-indexed return and a steady investment vehicle for the long term--not to mention the safety and backing of a U.S. government-issued security.

U.S. savings bonds have gone without due recognition as a savings and investment vehicle. Yet they have some distinct advantages. They can provide a guaranteed way to accumulate funds that will mature on a given date. They provide income tax advantages when used correctly in savings for education. And they can provide a very fine emergency fund.

As any other investment vehicle, they have a place in a portfolio. Review your investment goals and objectives to see whether U.S. savings bonds might not fill a certain niche.

Quiz 110
There is only one correct answer to each question.

1 Savings bonds are available from many sources and are affordable, with a low minimum purchase price and _______.
a. No down payment
b. Small monthly payments
c. No seller's commissions
2 A friend mentions that his savings bonds are based on the rate of Treasury securities. Your friend owns _______.
a. Series E bonds
b. Series EE bonds
c. Series I bonds
3 One reason to exchange your Series EE bonds for Series HH bonds might be to _______.
a. Receive a one-time tax refund of the amount exchanged
b. Earn a higher interest rate than the Series EE bonds paid
c. Receive regular interest payments
4 You can cash another person's savings bond if _______.
a. The owner is a member of your immediate family
b. You are the beneficiary listed on the bond
c. The owner is your child
5 The tax advantages of Series EE and Series I bonds include all of the following except _______.
a. No state taxes on earnings
b. No federal taxes on earnings
c. Special tax exclusions for some educational expenses
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