Important Changes to Series EE US Savings Bonds in 2005
Dec 20 2005 Is There a Better Alternative? Thinking of investing in Series EE Savings Bonds? You may want to think again. While Series EE savings bonds haven't been the most exciting investment over the years, they've been a reasonably good place to park some of your cash if you were looking for safety with a modest return.
The US Treasury has changed all that with its new policy for Series EE savings bonds issued on or after May 1, 2005.
The Feds have stopped adjusting interest rates on existing Series EE savings bonds. Now, when you buy a Series EE savings bond, the interest rate at the time of purchase will be locked in for the 30-year life of the bond, instead of fluctuating every six months. The Treasury guarantees that Series EE Savings Bonds will at least double in 20 years, so if yours hasn't done so at the end of 20 years, the Feds will make a one time adjustment.
The US Treasury Department will still set rates for Series EE Savings Bonds each May and November, but those rates will apply to new bonds only. With Certificate of Deposit (CD) rates for one year currently as high as 4%, it makes no sense to tie your money up for 30 years at the mid-2005 Series EE Savings Bonds rate of 3.5%.
Series EE Savings Bonds issued prior to May 1, 2005 will continue to earn interest under the terms in effect when they were issued, so you may want to hold on to those.
Is There An Alternative to Series EE Savings Bonds?
If you like the idea of investing in US Government Bonds, Series I bonds are an alternative to Series EE Savings Bonds.
Series I Bonds are sold at face value (as opposed to Series EE Savings Bonds, which are sold at one-half their face value and mature gradually to face value over time). You can buy Series I bonds in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000, for a total of $30,000 of paper bonds each calendar year, and an additional $30,000 worth of electronic I bonds each calendar year.
How Is Interest Calculated on Series I Savings Bonds?
Interest rates on Series I savings bonds are made up of two factors:
Are There Other Advantages to Series I Savings Bonds?
Series I savings bonds have tax advantages. Earnings are exempt from state and local income taxes. Federal income taxes can be deferred for up to thirty years, or until you redeem the bonds or take a taxable distribution on them.
You may be able to exclude all or part of the interest on I Bonds from income as long as you use the proceeds to pay for college tuition and fees. See IRS Publication 550, "Investment Income and Expenses" for details.
How Do I Buy Series I Savings Bonds?
You can purchase Series I savings bonds at most banks and other financial institutions, or through employer-sponsored payroll savings plans. You can also use the payroll feature in Treasury Direct to purchase bonds through your TreasuryDirect account via direct deposit.
Can I Cash Series I Savings Bonds In Before Their Maturity Date?
You can cash Series I savings bonds in after 12 months, but if you cash them in within five years of purchase, you'll forfeit three months of interest as a penalty.
Are US Savings Bonds For Me?
You can't find a safer investment than US Savings Bonds, even if the return is modest. Before purchasing savings bonds, make sure you're comfortable with locking your money up for 20 years. If there's a good possibility you'll need those funds early, you may want to consider Certificates of Deposit. Rates are rising as of mid-2005 and your money is more accessible.
The US Treasury has changed all that with its new policy for Series EE savings bonds issued on or after May 1, 2005.
The Feds have stopped adjusting interest rates on existing Series EE savings bonds. Now, when you buy a Series EE savings bond, the interest rate at the time of purchase will be locked in for the 30-year life of the bond, instead of fluctuating every six months. The Treasury guarantees that Series EE Savings Bonds will at least double in 20 years, so if yours hasn't done so at the end of 20 years, the Feds will make a one time adjustment.
The US Treasury Department will still set rates for Series EE Savings Bonds each May and November, but those rates will apply to new bonds only. With Certificate of Deposit (CD) rates for one year currently as high as 4%, it makes no sense to tie your money up for 30 years at the mid-2005 Series EE Savings Bonds rate of 3.5%.
Series EE Savings Bonds issued prior to May 1, 2005 will continue to earn interest under the terms in effect when they were issued, so you may want to hold on to those.
Is There An Alternative to Series EE Savings Bonds?
If you like the idea of investing in US Government Bonds, Series I bonds are an alternative to Series EE Savings Bonds.
Series I Bonds are sold at face value (as opposed to Series EE Savings Bonds, which are sold at one-half their face value and mature gradually to face value over time). You can buy Series I bonds in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000, for a total of $30,000 of paper bonds each calendar year, and an additional $30,000 worth of electronic I bonds each calendar year.
How Is Interest Calculated on Series I Savings Bonds?
Interest rates on Series I savings bonds are made up of two factors:
- a low fixed rate that remains the same over the life of the bond (1.2% as of mid-June, 2005)
- an adjustment, or kicker, for inflation (3.6% as of mid-June, 2005, for a total of 4.8%).
Are There Other Advantages to Series I Savings Bonds?
Series I savings bonds have tax advantages. Earnings are exempt from state and local income taxes. Federal income taxes can be deferred for up to thirty years, or until you redeem the bonds or take a taxable distribution on them.
You may be able to exclude all or part of the interest on I Bonds from income as long as you use the proceeds to pay for college tuition and fees. See IRS Publication 550, "Investment Income and Expenses" for details.
How Do I Buy Series I Savings Bonds?
You can purchase Series I savings bonds at most banks and other financial institutions, or through employer-sponsored payroll savings plans. You can also use the payroll feature in Treasury Direct to purchase bonds through your TreasuryDirect account via direct deposit.
Can I Cash Series I Savings Bonds In Before Their Maturity Date?
You can cash Series I savings bonds in after 12 months, but if you cash them in within five years of purchase, you'll forfeit three months of interest as a penalty.
Are US Savings Bonds For Me?
You can't find a safer investment than US Savings Bonds, even if the return is modest. Before purchasing savings bonds, make sure you're comfortable with locking your money up for 20 years. If there's a good possibility you'll need those funds early, you may want to consider Certificates of Deposit. Rates are rising as of mid-2005 and your money is more accessible.
