United States Savings Bonds

United States Savings Bonds are debt securities issued by the United States Department of the Treasury for use in funding routine government operations.

They are most popular among the general public for the following reasons:

• Principal and interest are guaranteed by the "full faith and credit" of the United States Government
• They do not require a large investment (the minimum needed to purchase a bond is a mere $25, whereas a certificate of deposit requires usually a $1,000 minimum)
• Purchases can be made via payroll deduction or by automatic bank withdrawal
• For residents of areas with state and local income tax, interest earned is not taxable within those jurisdictions (they are taxable only at the Federal level)
• Tax law allows for the interest to be tax free if the proceeds are used to fund higher education

History[edit]

The first bonds were issued in 1935 as a means of encouraging saving during the Great Depression. The Treasury has offered various forms of bonds, some issued at a discount to face value with face value paid at maturity, others at face value with principal and interest paid at maturity, and still others with periodic interest payments.

The most popular series was the Series E bond, originally issued in 1941 as a war bond but continued as an investment for the general public until it was retired in 1980.

All bonds reached maturity at a specified time in the future (usually 30 years from the issue date, which is always the first business day of the month, even if the bond was purchased later in the month). Even though the majority of bond series have reached maturity, and no longer earn interest, they still retain their value promised when purchased.^[1]

Unlike other Treasury debt instruments which can be freely traded, Savings Bonds have no secondary trading market.

Purchases and Series Offered[edit]

As of 2022 Treasury offers two series of bonds, Series EE and Series I. All bonds are purchased at face value. A minimum $25 is required to purchase, but can be purchased in odd amounts.^[2]

General Requirements[edit]

With the exception of some Series I bonds available in paper form, the majority of bonds are in electronic form only.

The following classes of buyers may purchase bonds:

• Individuals, provided that the person has a valid Social Security number, establishes a TreasuryDirect account, and is either:
  • A citizen of the United States,
  • A citizen of another country legally residing in the United States,
  • A civilian employee of the United States Government, regardless of citizenship or residence^[3], or
  • A child under 18 (a child cannot establish a TreasuryDirect account himself/herself but an adult can establish one for the child which must be linked to an adult's account).
• Trusts and estates having either a Social Security number or Employer Identification number (but for Series I bonds not all trusts and estates can purchase paper bonds)
• Corporations, partnerships, and similar entities having an Employer Identification number (but these entities cannot purchase Series I paper bonds)

Purchases can be made either by a payroll savings plan established through TreasuryDirect, or purchasing them directly via TreasuryDirect.

Each individual Social Security Number or Employer Identification Number can acquire up to $10,000 of each type of bond per calendar year (purchases and gifts are combined towards the limit, except that bonds acquired as a beneficiary of a deceased holder are not counted toward the limit, as well as paper bonds issued prior to 2008 can be converted to electronic bonds and not count against the limit). In addition, an additional $5,000 in paper Series I bonds can be purchased from a tax return refund.

Interest is accrued monthly and paid semi-annually. Although new rates are set on the first business day of May and November, the rates for a bond are applicable for each six month period after issuance regardless of an intervening change (thus, a bond purchased in October will earn the rate set in the previous May from October-March, then it will earn the rate set in the previous November from April-September, and so on until redeemed or maturity). A bond must be held for 12 months prior to redemption (however, in the event a particular area has suffered a natural disaster, Treasury has the authority to waive the requirement and allow early redemption for bondholders in that area), and if redeemed between one and five years, the last three months of interest are forfeited; after five years a bond can be redeemed for full principal and all accrued interest. Interest can be tax-deferred until the bond is redeemed.

Series EE Bonds[edit]

Series EE Bonds are available in electronic form only.

Series EE Bonds earn a fixed rate of interest for 20 years; however, they are guaranteed after that time to be worth no less than twice their face value. They will continue to earn a fixed rate for ten years thereafter but after 30 years no further interest is earned.

Series I Bonds[edit]

Series I bonds can be purchased in electronic form, or if using the proceeds from a tax refund as paper bonds.

Series I bonds have two components to the rate:

• A fixed rate, which remains the same for the life of the bond (and can be 0%), and
• A variable rate, calculated and revised semi-annually using the non-seasonally adjusted Consumer Price Index for urban areas (CPI-U) for a six-month period ending one month prior to May and November, multiplied by two (this rate can be negative, but if the combination of the fixed and variable rate would result in a negative amount, the total rate will be set at 0%).

The formula for calculating a bonds composite rate is: (fixed rate + the variable rate multiplied by two + the fixed rate multiplied by the variable rate), rounded to four decimal places.

As with Series EE Bonds, Series I bonds stop accruing interest after 30 years.

References[edit]