What are Savings Bonds and their Tax Benefits?
There are three important types of savings bonds currently being issued:
Series EE bondsEE bonds are purchased for half of their face value, and they can be redeemed for their facevalue at maturity, which is determined by the interest rate at the time of purchase. However, they can be redeemed at any point after six months for the current value without incurring a penalty. Interest accrues on the first day of each month, making that the best day to redeem savings bonds. All interest and principal is paid only at redemption. Denominations range from $50 to $10,000. At maturity, the bond will automatically enter extended maturity and earn interest according to rates at the beginning of that period. EE bonds will continue to earn interest for 30 years after they are purchased. Once they have reached maturity, EE bonds may be exchanged for Series HH bonds in order to continue to earn interest and further defer federal taxes. An individual can purchase up to $30,000 face value in savings bonds in one year.
Series HH bondsHH bonds are acquired by exchanging EE bonds for them at maturity. HH bonds are available in denominations ranging from $500 to $10,000 and, unlike EE bonds, are sold at face value. They pay interest every six months and continue to earn interest for 20 years. The interest rate at the time of purchase is locked in for the first 10 years that the bond is held. After ten years, HH bonds enter extended maturity and the new interest rate is determined by the rate assigned to new bonds issued at that time.
Series I bondsI bonds are inflation-indexed savings bonds that pay a fixed interest rate for the life of the bond and a variable rate that tracks inflation as measured by the Consumer Price Index. They are sold at face value and pay interest every 6 months. The inflation-adjusted portion of the return is recalibrated semiannually. Up to $30,000 may be invested in I bonds each year by a single individual. I bonds pay interest for up to 30 years, but there is a penalty equivalent to 3 months of earnings for redeeming the bond before 5 years.
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