U.S. Savings Bonds

Giving a U.S. Savings Bond as a gift is a popular way to commemorate a special occasion, such as a birthday, anniversary or graduation. They are a low-risk investment, since the bonds are backed by the full faith and credit of the U.S. government and there is no risk of loss to principal. U.S. Savings Bonds also provide special tax benefits for college savings.

Interest Rates

The interest rates on Series I and Series EE U.S. Savings Bonds differ.

  • Series I U.S. Savings Bonds provide a hedge against inflation in addition to investment returns. The interest rate on a Series I U.S. Savings Bond is a combination of a fixed rate and a variable inflationary adjustment. The combined rate may not be less than 0%, even if inflation is negative.
  • The interest rate on Series EE U.S. Savings Bonds is a fixed rate. (Series EE U.S. Savings Bonds issued from May 1997 to April 2005 had variable interest rates.)

Both types of U.S. Savings Bonds earn interest for up to 30 years. Both types of bonds are now purchased at face value, so a $50 savings bond costs $50.

Investment Limits

Each bond owner may buy no more than $10,000 of each type of U.S. Savings Bond per year. For example, each owner can buy up to $10,000 in Series I bonds and $10,000 in Series EE bonds. So a child’s father and mother could buy a total of $20,000 in Series I bonds and $20,000 in Series EE bonds per year. Note that these limits are per owner, not per beneficiary. There is no limit on savings bonds that can be accumulated for qualified educational expenses over time, as long as the bonds do not exceed the annual purchase limitations.

Income Tax Exclusion

Series I and Series EE U.S. Savings Bonds are exempt from state and local income taxes. The interest on Series I and Series EE U.S. Savings Bonds may also be exempt from federal income tax when the bonds are used to pay for qualified higher education expenses or when rolled over into a 529 college savings plan, prepaid tuition plan or Coverdell education savings account.

The Education Bond Program provides this special federal income tax treatment on Series EE U.S. Savings Bonds issued on or after January 1, 1990 and on all Series I U.S. Savings Bonds. A parent must be the owner of the U.S. Savings Bonds and the bonds must have been issued when the owner is 24 years old or older to qualify for the income tax exclusion.

Investors who are considering U.S. Savings Bonds because the interest may be excluded from income when the bonds are used to pay for certain college costs should note that this special tax treatment is subject to income phase-outs. If the bond owner’s income is likely to exceed the income phase-outs, it may be advisable to roll the bonds into a 529 college savings plan, prepaid tuition plan or Coverdell education savings account while the bond owner’s income is still below the income phase-outs. The tax-free treatment of 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts is not subject to income phase-outs. Savings bond holders can elect to pay tax on interest annually, as it accrues, or defer the tax until the bond is redeemed or stops earning interest at final maturity.

Gift Certificates

Treasury Direct provides gift certificates that can be customized and printed to tell the recipient about the gift of a U.S. Savings Bond.

Other Types of Bonds Not Eligible

Other types of U.S. Treasuries, such as Treasury Inflation-Indexed Securities (TIPS) and Zero Coupon Bonds (STRIPS), are not eligible for the education bond program. The interest on these securities is subject to federal income tax even if the securities are used to pay for qualified higher education expenses.

These securities are also higher-risk, because they are marketable bonds that can be bought and sold on the open market. The value of the bond will fluctuate with changes in prevailing interest rates. Interest rates and bond prices move in opposite directions. When the interest rates rise, the price of an existing longer-term bond will decrease. Bonds that are closer to maturity, such as short-term bonds, are less at risk of loss to principal since one can always hold the bond until it matures to sell it for the full principal value.

For More Information

More information about U.S. Savings Bonds may be obtained by calling 1-800-4US-BOND (1-800-487-2663), sending email to SavBonds@bpd.treas.gov or visiting www.savingsbonds.gov.

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