Savings bonds are not affected by the ups and downs of the stock market, which is different from regular bonds. Savings bonds are low-risk bonds backed by the government with guaranteed interest rates. Savings bonds have a tax benefit because the owner may be able to keep some or all of the interest from their Federal income tax.
Savings bonds come in three different types: I, EE/E, and HH/H. The US Treasury Department is in charge of making them. You can only buy them in one of three ways: 1) through a bank or other authorised financial institution, 2) by taking money out of your paycheck, or 3) through an online service called TreasuryDirect. All savings bonds are registered to the person who owns them and held in their name. Savings bonds are official investments. You can get new ones if you lose or break them.
The only way to buy Series I bonds is at face value. Series I bonds can be bought in amounts from $50 to $10,000. Each year, you can only buy up to $30,000 (in face value) of paper bonds and $30,000 (in face value) of electronic bonds. They must be held for at least one year, and interest will be added to them for up to 30 years. Interest on Series I bonds is based on a fixed rate (which is announced by the Bureau of Public Debt in May of each year) and an annual inflation rate (announced in November of each year).
When the bond is cashed in, interest is paid. If this happens before the bond is five years old, you will have to pay a penalty of three months' worth of interest. Interest is not taxed by the state or city. It is, however, subject to estate, gift, and other excise taxes at the state and local levels. The interest on the bonds is also taxed by the government. If the bonds are used to pay for school, all or part of the interest may not be taxed by the federal government.
Series EE bonds took the place of Series E bonds. EE bonds are very cheap and can be bought for half of what they're worth. You can get them in amounts from $50 to $10,000. A person can buy up to $30,000 worth of paper bonds and $30,000 worth of electronic bonds per year. The rate of return on EE bonds bought between May 1997 and April 30, 2005 is based on the market and can change. From May 2005 on, bonds with a fixed rate of interest are given out. They will earn interest for 30 years, and the interest will be added to itself every six months. The Series EE bonds are like the Series I bonds in that they pay interest and can be cashed in at the same time. The way interest rates are calculated is the main difference between EE and I bonds. EE Bonds get 90% of the average yields on the market for 5-year Treasury Securities over the past six months.
Before September 2004, you could only buy Series HH savings bonds in exchange for Series EE/E bonds. They could be bought without them after that date. You can buy Series HH bonds in amounts ranging from $500 to $10,000. They are bought for what they are worth. There are no limits on how much can be bought.
The interest rate on Series HH bonds is set at the time they are bought and won't change for 20 years. The owner's checking or savings account is automatically credited with the interest. Savings bonds from the Series HH must be kept for at least six months. Like Series I and EE, State and local taxes do not apply to the interest on Series HH bonds. It is, however, subject to inheritance, gift, and other excise taxes at the state and local levels.
