U.S. Savings Bonds

There are two types of savings bonds that are currently being issued: the Series EE and Series HH. U.S. savings bonds are registered, nontransferable, and noncallable securities. Because they are nontransferable, they aren’t marketable—you can’t sell them to another party, you can only redeem them. They are also unable to be accepted as collateral for a loan because of this provision.

Series EE bonds are sold in par value amounts of $50 to $10,000, but the purchase price is 50 percent of the face value (i.e., you pur- chase a Series EE bond with a face value of $5000; your cost is $2500). Any single investor can purchase up to $15,000 in face value of EE bonds in a single calendar year. The other limitation on EE bonds is a maximum purchase of up to $15,000 par value each for bonds that are registered in co-ownership form. Series EE bonds do not pay current interest the way Treasury notes and bonds do; rather, they are issued at a discount and then pay face value upon maturity. EE bonds do earn an interest rate that is 90 percent of the average return on marketable Treasury securities, which is called a marketbased rate. This is set by the Treasury every six months. EE bonds may be redeemed at any time, provided the owner has held them for more than six months. Redemption within the first five years of the bond’s life, though, will decrease the effective yield on the bond.

Upon redemption of EE bonds, the investor is taxed on the difference between the purchase price of the bond and the redemption price, but the interest on EE bonds may be tax-exempt in certain cases. If the principal from the bond is to be used for education, whether it is for your child, grandchild, or yourself, the interest is taxfree, provided your income meets certain limits. Any interest earned on a savings bond is also exempt from state and local income taxes.

Series EE bonds can be exchanged for Series HH bonds at par value. Like the EE bonds, the denominations for HH bonds range from $50 to $10,000. Unlike the EEs, HH bonds pay interest semiannually. They can also be redeemed at any time, as long as they have been held for at least six months. However, they can be held for up to 20 years to accrue interest. By exchanging EE bonds for HH bonds, an investor can be privy to a long period of tax deferral. As long as the EE bonds are exchanged for HH bonds not more than one year after the EE bonds mature, the tax due on all the interest earned on the EE bonds is deferred until the HH bonds are redeemed.