According to the Minnesota Society of CPAs, savings bonds could have a place in your portfolio, particularly if you're looking for low-risk investments.
Q. What are the types of U.S. savings bonds?
A. There are two types of savings bonds currently available -- Series EE and Series I. As of May 1, 2005, newly issued Series EE bonds have a fixed interest rate, based on 10-year Treasury note yields. Series EE bonds purchased May 1997 through April 30, 2005, pay interest based on current market rates. The fixed rate and inflation adjustment on new bonds are announced every May 1 and Nov. 1.
Series I savings bonds differ in that they pay an interest rate that is indexed for inflation, based on the Consumer Price Index.
Q. How are U.S. savings bonds sold?
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A.They are available in paper or electronic form. Paper Series EE and Series I bonds come in $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. (Paper EE bonds are issued at 50 percent discount from face value.) Electronic Series EE and Series I bonds are sold at face value in any amount from $25 to $30,000.
There is an annual purchase limit of $30,000 per owner for Series EE Bonds and $30,000 for Series I Bonds. Purchases of one series do not count against the limit for the other.
Q. How long do savings bonds earn interest?
A.Savings bonds earn interest on a tax-deferred basis for 30 years from the issue date.
Q.Where do I buy savings bonds?
A.You may buy paper savings bonds at financial institutions authorized by the Treasury Department or through employer payroll deduction plans. You can buy and hold savings bonds in an electronic account at www.TreasuryDirect.gov .
Q. How do I redeem my savings bonds?
A.Take them and ID to your financial institution. Savings bonds issued after February 2003 must be held for one year before they can be redeemed, and if you redeem them in less than five years after purchase, you forfeit the three most recent months of interest.
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Q. What tax advantages do bonds offer?
A.The interest earned on savings bonds is always exempt from state and local income taxes. You can defer federal income taxes on the interest your bonds earn until the savings bonds reach final maturity or you redeem them. You may treat the annual increase in value as income in each year.
Your earnings from Series EE and Series I savings bonds may be excluded from federal income tax if you pay qualified higher education expenses in the same year you redeem the savings bonds. Your household income must meet certain guidelines to qualify for this exclusion. A CPA can help you determine how to make the most of your investment in savings bonds.
Money Management is a series provided by the Minnesota Society of Certified Public Accountants. Visit www.mncpa.org or call (800) 331-4288.
