For savers and conservative investors nothing is more popular than Series EE Savings Bonds. They’re issued by the government and designed for those who don’t want to risk losing any money. Some $5.3 billion worth were sold in the last fiscal year. Buyers think of them as simple and safe.
Safe, yes. But they’re not always as simple as you may think–especially in view of the many changes that have been made in recent years. Here are answers to the savings-bond questions I get asked most often:
1. WHAT DO I PAY?
You pay half the bond’s face value. A $50 bond costs $25 (the minimum purchase). A $5(H) bond costs $250. There are no fees to buy or redeem, and EE bonds can be bought through most hanks, many savings and loans, any Federal Reserve bank, and perhaps through a payroll-deduction plan where you work.
2. WHAT DO I EARN?
Currently 5.59 percent–a rate that changes every May 1 and November 1. The interest builds up inside the bond and is paid when you redeem. Tip: Whenever you want to check on the current EE-bond interest rate, call 800-US-BONDS (800-872-6637).
Interest on bonds purchased since May 1997 is credited at the first of every month. But interest on most bonds bought before May 1997 is credited only every six months. You can lose serious money c,n these older bonds by cashing out just before an interest-crediting date. To find out when that is, get the government’s table of Interest Accrual Dates free from the U.S. Savings Bond Operations Office (see “Savings-Bond Resources”).
3. WHAT IS MY INTEREST-RATE GUARANTEE?
There isn’t one, on bonds bought since May 1997. Older bonds have various guarantees, ranging from 4 to 6 percent, depending on when you bought them. Yip:When redeeming old bonds, cash in the ones with the lowest guarantee first.
4. HOW LONG DO I HAVE TO HOLD AN EE BOND?
At least six months. After that, you can redeem whenever you want and get back your investment plus interest. But plan to hold for at least five years: If you cash in any earlier, you’ll pay a three months’ interest penalty.
5. WHAT TAXES DO I OWE?
You can put off paying taxes on EE-bond interest until the bonds are redeemed. At that point, you’ll owe only federal tax. The interest is exempt from state and local taxes.
6. WHEN DO THE BONDS MATURE?
There are several maturity dates. At the end of each maturity period, the interest-rate structure and other terms of your EE-bond investment can he changed.
The original maturity is 17 years That’s the maximum time it will take for your investment to double. For example, when you pay $25 for a $50 bond, the government guarantees you $50 after 17 years (a 4.1 percent return). If interest rates are higher, your investment will double in less than 17 years. But you don’t have to hold until this date. Cash in your EE bonds whenever you need to.
The final maturity is the date after which your EE bonds will no longer pay interest. Newly issued bonds will reach final maturity in 30 years. Older Series E bonds earn money over 40 years. Tip: Right now interest is no longer paid on $3 billion worth of Series E bonds–those issued earlier than April 1958 and those issued between December 1965 and April 1968. Ask your older relatives if they have any of these bonds–they’ll want to cash them in right away.
7. SHOULD I USE EE BONDS TO SAVE FOR HIGHER EDUCATION?
They’re not as attractive as they used to be. EE-bond interest can be tax-free if used to pay tuition and fees, but not in the same year you claim one of the new education tax credits–the Hope Scholarship or Lifetime Learning credit. And the credits are probably worth more.
But the rules might change. At present, EE-bond interest can he used tax-free for education if you meet all of the following requirements: You bought the bonds after January 1, 1990; at the time of purchase, you were at least 24; the bonds are in your name or co-owned with your spouse; and you meet an income test. The income limits rise with inflation: In 1997, the full tax break went to single parents earning up to $50,850 and couples earning up to $76,250.