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Table of Contents
Lesson 1: Types of Savings bonds
Lesson 2: 5 Things All Savings Bond Investors Should Know
Lesson 3: How to Buy US Savings Bonds
Lesson 4: How to Give Savings Bonds as a Gift
Lesson 5: How to Know if Your Savings Bonds Have Stopped Paying Interest
Lesson 6: How to Redeem Lost or Stolen Savings Bonds
Lesson 7: How to Earn 3.5% on US Savings Bonds
Lesson 8: How to Cash in Savings Bonds
Lesson 1: Types of Savings bonds
Savings bonds are often viewed as old fashioned in today’s society, and are really only seen as
a gift you might give to a new baby or a grandchild. Savings bonds are however considered
one of the safest investments in the world, as they are fully backed by the credit of the U.S.
government.
A savings bond is simply a debt security issued by the U.S. Treasury to help pay for government
needs. There are two types of U.S. Savings bonds, which are series EE and I bonds.
Series EE Bonds
EE savings bonds are a low risk savings product that are often used toward education costs,
retirement savings, and gifts for special events. Series EE bonds earn a fixed rate of return for
the entire life of the bond, and interest is compounded monthly starting on the first day of the
month in which they are purchased. The interest is added onto the value of the bond, so you
automatically get the benefit of compounding.
EE Bonds are sold at face value, i.e. you pay $100 for a $100 bond. At redemption, you will
receive the face value of the bond plus the accrued interest. If you redeem a bond within
the first five years of purchase, you will forfeit the interest payments from the previous three
months. After 5 years has passed you are not penalized for resumptions.
For current rates on Series EE Bonds go here.
Series I Bonds
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I Bonds are a low risk savings product. What makes them different from EE Bonds is the rate
of interest they earn. The I Bond interest rate is made up of two components, a fixed and
variable rate, which is set to reflect current inflation rates.
The fixed component of interest stays the same for the life of the bond. The inflation
component however is reset every 6 months. For example, an I Bond could have a 1.00%
fixed component and a 2.6% inflation component. In this case, the interest rate would be an
annualized rate of 3.6%, until the inflation component is reset.
Although it does not happen often, if there is negative inflation (referred to as deflation) the
inflation component in that period would be negative. This would mean that the combined rate
would be below the 1% fixed component. No matter how much deflation there is however the
combined interest is not allowed to go below zero.
For current rates on I Series Savings Bonds go here.
I Bonds are also offered at face value and have the same early withdrawal penalties as EE
Bonds.
Series H/HH Bonds
Also called Current Interest Bonds, a holder of these bonds earns interest payments every
six months from the date of issue. They do not increase in value and are worth exactly what
you paid for them at the time of maturity. HH Bonds were discontinued in 2004 however are
included here for comparison purposes. HH Bonds have a maturity date of 20 years and can
still be converted to EE Bonds.
Which is Better, Series EE Bonds or I Bonds?
No wrong answer here, however I bonds typically outperform EE bonds. The only downside
of I Bonds is that they could earn very little interest during times of a weak economy and
deflation. In fact, during the recent recession the variable rate actually wiped out the fixed rate
for a period of time, causing I Bonds to yield 0% for a while.
The following table shows the pros and cons of each type of bond.
I Bonds
EE Bonds
Maximum Purchase Limit
Per Year
$10,000
$10,000
Minimum Purchase
Amount
$25
$25
Denominations
To the penny, $25 or more.
To the penny, $25 or more.
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Earnings
A fixed interest rate and a
variable rate combined.
Fixed rate of interest.
Minimum Term of
Ownership
1 year
1 year
Interest Earning Period
30 years
30 years
Early Redemption
Penalties
3-month interest penalty if
redeemed during the first 5
years.
3-month interest penalty if
redeemed during the first 5
years.
Inflation Indexing
Semiannual inflation rate
announced in May and
November.
N/A
Regardless of which type of savings bond you decide to purchase, both are very safe and easy
investments for your portfolio.
Lesson 2: 5 Things All Savings Bond Investors Should Know
1) There are two types of saving bonds: EE Savings Bonds & I Savings Bonds.
EE bonds provide a fixed interest rate which will remain constant through the life of the bond.
I bonds are more complicated, they have a fixed component , and a variable component which
changes every 6 months based on inflation. EE bond will always pay a higher yield than the
fixed component of an I Bond. In fact, the fixed component of I Bond right now is zero. You
earn no fixed interest.
2) EE Savings Bonds Are A Great Long Term Investment for 3 Reasons
1. SAFETY: Just like a Treasury bond, the safest investment known to mankind, US
Saving Bonds are backed by the Full Faith & Credit of the US government.
2. GOOD YIELD: When held to maturity (20 years after purchase), an EE Savings bond
is guaranteed to double in value. Your effective yield is 3.5% (learn how you can earn
3.5% with a savings bond here). I Bonds do not offer this benefit.
3. TAX DEFERRED COMPOUNDING: You don’t have to pay any taxes until you cash in
your bonds.
3) EE Saving Bonds Are A Terrible Short-Term Investment
If you don’t think you can wait 20 years to cash in a savings bond, you should not get one. First
of all, you cannot legally sell a savings bonds. You can only redeem them with the US Treasury.
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You’re not allowed to redeem them at all until you have held them for at least 12 months. After
that, you have to pay a penalty, which is a minimum of 3 months of interest. Most importantly,
the interest rate sucks if you don’t hold EE bonds to maturity. Forget about earning 3.5%, you
won’t even receive 1% based on the current rate.
4) Have you lost paper savings bonds?
Join the club, there are over $10 billion dollars worth of unclaimed savings bonds. Uncle Sam
wants you the have the money and has set up the site TreasuryHunt.gov to help you recover
them.
5) You can no longer buy paper savings bond. You must go to TreasuryDirect.gov and order
them online.
Lesson 3: How to Buy US Savings Bonds
Sorry, if you are looking for how to buy US savings bonds in paper format, we unfortunately
cannot help you. Paper savings bonds were discontinued in January of 2012. The
only way to buy US savings bonds today is electronically through the US Treasury
website,TreasuryDirect.gov. You will need to set-up an account prior to purchasing the bonds.
As savings bonds (EE and I Series) are only sold directly by the US Treasury, there are no
commissions to pay to a broker when buying US savings bonds. There is however a maximum
amount of bonds that can bought per year.
You can buy up to $10,000 per bond type, per social security number, per year. In other
words, an individual could buy up to $10,000 of EE savings bonds and up to $10,000 of I
Bonds in a single calendar year. A married couple without children could buy up to $20,000 of
EE bonds and $20,000 of I Bonds in a single calendar year. You can buy US savings bonds in
any denomination, starting at $25.
How to Buy US Savings Bonds Through a Payroll Saving Plan
You may also enroll in the Payroll Savings Plan, which allows employees to buy US savings
bonds in various denominations. Once you decide on a denomination, this amount will be
automatically withdrawn from your paycheck and can be used for purchasing both Series I and
EE series savings bonds.
This program can either be combined with an existing retirement investment vehicle such as
a 401 (k) or stand alone. The Payroll Savings Plan is easy to set up and has currently been
utilized by over 40,000 employers. Once the program has been activated, Savings Bonds are
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bought for you, and will continue until written notice is received or when you leave your place
of employment.
Who Can Buy US Savings Bonds?
Corporations, associations, public and private organizations, fiduciaries and of course individual
citizens can own U.S. savings bonds. U.S. Savings Bonds are issued to anyone who meets any
of the following criteria.
●
●
●
●
Resident of the United States
Citizen of the United States and living abroad (must have a U.S. address on record
however).
Civilian employee of the U.S. (regardless of your residence).
A minor, unlike many other investments and securities, minors may legally own U.S.
Savings Bonds.
Savings Bonds are non-marketable securities, which means they cannot be sold from one
investor to another. All purchases and sales of Savings Bonds must be done through the U.S.
Treasury department.
Lesson 4: How to Give Savings Bonds as a Gift
Leave it to government to make a simple, easy process like buying savings bonds as a gift,
complicated, cumbersome and time consuming for both you and the recipient. The process of
walking into a bank and walking out with a savings bond is over as 2012. You will now need to
purchase them online. Unless you’re planning on giving savings bonds on multiple occasions to
the same person, you may not find the effort worthwhile.
Before you buy a savings bonds as a gift, you should know the following:
1. Both, you and the recipient (or parent of recipient) are going need to set-up online
Treasury Direct Accounts.
2. You are going to have to ask the recipient or their parent for their social security
number and their Treasury Direct Account number. (Unless, you’re a close relative
asking for a social security number might be a little uncomfortable.)
Assuming that the requirements above don’t prevent you from proceeding, here is the process.
You may also want to watch the following video from Treasury Direct on gifting savings bonds.
Step 1) Set-up a Treasury Direct Account. You will need your bank account and number, as
well as your SSN# to set-up an account.
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Step 2) Once you set-up an account. You need to use the “Buy Direct” button on the top
navigation. You cannot use the “Purchase Express” function for gifts
Step 3) Select the type of savings bond you want to purchase. We recommend that you select
EE bonds for children. Learn about the differences between EE and I Savings Bonds here.
Step 4) After selecting the type of bond, you will need to add the name of the recipient of the
bond. Click on “Add New Registration”. You will need enter the recipient’s full legal name and
social security number. On this page, please make sure to check “This is a gift.”
Step 5) Decide on the amount. The minimum is $25.00 and maximum is $10,000. Any amount
in between in one cent increments is available. There are few self-explanatory steps to follow
after this to purchase the savings bonds.
Step 6) Please note, you will not see the bonds that you purchased in your account until one
business day after that transaction. You will not be able to “send the bonds” to recipient until 5
days after your purchase has been made, as the treasury waits for the funds to arrive from your
bond. At that point, you will be able to click on the “gift box” tab in the navigation and see the
bond you purchased.
Step 7) To send the bond to the recipient, which means having the bond move from your
online account to theirs, you will need click on the bond in the gift box and input THE
RECIPIENT’s Treasury Direct Account Number.
Step 8) What if you want the recipient or their parents to know that you purchased a savings
bond for them. The Treasury does make available several cheesy “gift certificate” templates
that you can print out and fill in. While they are called gift certificates, they have no economic
value or legal status.
Lesson 5: How to Know if Your Savings Bonds Have Stopped Paying Interest
Interest on savings bonds can provide you with an income – but only until the bonds stop
paying interest. Savings bonds are issued with original terms to maturity, and then may
automatically enter one or more extension periods, during which they will continue to pay
interest. However, many people lose track of when such interest payments will really stop.
When that happens, you’re no longer just losing income, but inflation is also eroding the
redemption value of your bonds.
Savings bonds that have stopped paying interest
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The U.S. Treasury provides information on savings bonds it issued that no longer pay out
interest.
The following saving bond series have stopped paying interest:
●
●
All issues of A, B, C, D, E, F, G, H, J and K bonds
All issues of Savings Notes (Freedom Shares)
Depending on the issue date, the following bond series may have stopped paying interest:
EE Series savings bonds issued through November 1981 based on the date this article was
published of 11/1/2011 (EE bonds have a 30 Year Maturity Term. If the current date was July
2018, EE Series bonds issued through July 1988 would have stopped paying interest.)
HH Series Saving Bonds issued through November 1991 based on the date this article was
published 11/1/2011 (HH bonds have a 20 Year Maturity Term. If the current date was July
2018, HH Series bonds issued through July 1998 would have stopped paying interest. New
issues of HH serues saving bonds were discontinued as August 2004. )
When will I Saving Bonds stop paying interest?
All I series bonds are paying interest at the time this article is being published. I Series Bonds
were first issued in 1998 and will pay interest for 30 years after maturity. An I bond Issued
1998 would stop paying interest in 2028.
Online aids for you to find the value of your bonds
The U.S. Treasury provides other useful information such as the length of time each type of
bond pays out interest, and an online query tool called “Treasury Hunt” to help you determine
if you own any bonds that have matured. On the U.S. Treasury website, there’s also a “Savings
Bond Wizard” to tell you the value of your bond, how much of that value is interest income, and
what the yield of the bond was over its period to maturity. If the bond has not yet matured,
you’ll also see its current yield.
Lesson 6: How to Redeem Lost or Stolen Savings Bonds
Have you lost savings bonds that were given to you on your 10th Birthday or other special
occasion? You are not alone. According to the US Treasury, billions of dollars of savings bonds
have stopped accumulating interest without being cashed in.
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That $100 lost savings bond could be worth a nice sum. For example, a $100 E Series savings
bondpurchased in 1977 is worth around $550 today. Too bad it stopped earning interest 5
years ago. Motivated? Good!
Use Treasury Hunt To Look Up Lost Savings Bonds By Your Social Security #
Treasury Hunt is a somewhat limited service (it only includes Series E bonds that were issued
after 1974 and have matured). To use it you just input your social security #. Go To Treasury
Hunt
What do you do if you lost the physical savings bonds and/or Treasury Hunt does not have a
record of them?
Not to worry, the Treasury Department has a form for lost or stolen savings bonds. You don’t
need to know the serial # of the bond, but the more information you provide, the more likely
that you will be able to get back the bonds or receive payment for them. Complete and follow
the instructions onForm PDF 1048 “Claim For Lost, Stolen, or Destroyed United States Savings
Bonds”
Lesson 7: How to Earn 3.5% on US Savings Bonds
Buy an EE Series US Saving Bond
This sounds too good to be true. You must be thinking “What’s the catch?” There is one catch,
and its a big one:
You cannot redeem the savings bond until maturity (which is 20 years after the bond is issued).
If you need to cash-in the bond, you will earn a measly 0.6% minus any early withdrawal
penalties.
That is the only catch but there is one other limitation: The maximum amount of EE bonds a
person can purchase is $10,000 per year.
This 3.5% interest rate is not a temporary teaser rate or subject to change. However, you will
not see this rate advertised anywhere on the Treasury Department website.
You will see the following statement:
At a minimum, the U.S. Treasury guarantees that an EE Bond’s value will double
after 20 years, its original maturity, and it will continue to earn the fixed rate
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unless a new rate or rate structure is announced. If a bond does not double in
value as the result of applying the fixed rate for 20 years, the U.S. Treasury will
make a one-time adjustment at original maturity to make up the difference. Series
EE bonds earn interest for 30 years.
Source: US Treasury Dept
When I read this statement, I thought it was odd. At the time that this article was researched
(11/1/2011) the interest rate on the EE series savings bond was 0.6%. There was no way that
an interest rate of 0.6% could lead to doubling of the value of a bond in 20 years. Then, I made
use of the rule of 72 to figure out how long it would take for a bond to double in value. The
rule of 72 states that if you take the number 72 and divide it by the interest rate you get the
number of years it will take for your money to double.
For anything earning less than 1%, it would take more than 72 years to double your money. As
this is the case, the effective interest rate on EE Series savings bonds had to a lot more than
0.60%. Using semi-annual compounding over 20 years, a $1000 bond will become $2001.60
(double in value) with an interest rate of of 3.5%.
How good is a 3.5% interest rate?
At the time this article was written (11/1/2011) that is about 1% higher than the rate a 20 Year
Treasury bond is paying. This is pretty good considering that you are getting about 33% more
interest for the same level of risk.
Lesson 8: How to Cash in Savings Bonds
You can not cash in savings bonds that are less than one year old. After holding a savings
bond for 1 year you can cash it in at anytime, however there are some additional factors to
consider:
●
●
●
When cashing in savings bonds within the first five years of purchase, you will have to
forgo the previous 3 months interest payments.
U.S. Savings Bonds fully mature in 30 years, meaning they stop earning interest at
that point.
You can cash in savings bonds at anytime after the 30 year maturity date, but you do
not earn any additional interest when holding for longer than 30 years.
Who can cash in savings bonds?
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In order to cash in a savings bond you must be the owner, co-owner or have power of attorney
over the owner or co-owner. If you are the legal guardian of either that is also sufficient.
If the owner of the bond has died, then the bond goes to the beneficiary listed when the
bond was purchased. If there is not a beneficiary listed, the bond passes to the estate of the
deceased owner.
The primary owner and co-owner listed have equal rights over the bond, meaning the co-owner
can redeem the savings bond without the owner’s consent and vice-versa. Be sure to take
careful consideration over whom you list as the co-owner!
How do you cash in a savings bond?
There are two ways that you can cash in a savings bond, electronically through TreasuryDirect
or through a participating local bank. However, it’s unclear how many banks will provide
savings bond redemption services now that the government has stopped selling paper savings
bonds. You can convert paper I and EE/E bonds into electronic bonds through the Treasury’s
SmartExchange program. The first step to using this program is opening a account with
Treasury Direct, which you can do here.
To help you with that process there is a list of detailed Instructions on how to convert paper
savings bonds to electronic bonds here. When using Treasurydirect, you can cash in an
unlimited number of savings bonds for an unlimited amount of money. The funds will arrive
in your checking or savings account within one business day of making the request. When
you cash in savings bonds with a bank, the maximum cash amount that you can immediately
receive is $1,000.
1099-INT Form
When you cashing in a savings bond, you will be issued a 1099-INT form on any interest
earned. Make sure you file your form with your taxes, the government already has a copy and
if you do not file this form the IRS will withhold your federal return. That being said double
taxation of savings bond income happens quite often. If you elected to report the interest
income each year, the 1099-INT will not be reduced by the amount of interest income that
was reported in previous years. It is your responsibility to keep track of this information and
properly file your return.
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