Savings Bonds

What Can a Series EE Savings Bond Help Me Do?

For many years when bonds were mentioned, people thought of U.S. savings bonds. In many ways, they are the original zero-coupon bonds. You buy them at a deep discount from their face value and, upon maturity, the government pays the full face amount.

For a long time, savings bonds were out of favor with all but the most conservative investors. Then in 1982, Congress raised the minimum return on Series EE bonds, linking it to that of five-year Treasury securities.

New EE bonds earn 90 percent of the average yield on five-year Treasury notes during the preceding six months.

And EE bonds are not subject to state and local taxes. And federal taxes are deferred until the money is actually withdrawn.

If you are saving for college tuition for a child, EE bonds can be particularly attractive. With certain limitations, interest on the proceeds from EE bonds used to pay for college tuition may escape federal income taxes as well.

While EE bonds are much like other zero-coupon bonds, there are some important differences.

On a regular zero-coupon bond, investors must pay taxes on the imputed interest, even though it’s not actually paid to the investor until the bond matures.

On the other hand, the federal income tax on an EE bond is deferred until the money is withdrawn. And as we’ve seen, in some cases, even state and local taxes can be waived.

EE bonds are sold in denominations as low as $50. That makes them very attractive for first-time investors and as gifts.

For savers who want a very safe, conservative place to park moderate to large amounts, denominations go up to $10,000.

Anytime you wish, you can convert EE bonds with denominations of $500 or more to HH bonds. HH bonds pay interest twice a year. This interest is subject to federal income taxes, but not state or local income taxes. And the increased principal from the EE bond won’t be taxed until your capital is withdrawn.

This provides a rather useful safety net if you don’t want to pay income taxes immediately upon maturity.

EE bonds are still an excellent way to increase your money tax deferred. And HH bonds provide a safety net in case you need to convert them rather than paying penalties for using them for a purchase other than college tuition.