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Savings Bonds

By: Max Plata

Savings bonds are a great way to save money for your future. Either purchased yourself, or given as a gift, savings bonds ensure you that you will have at least some amount of savings later on.

Although you may already know a little about savings bonds, either owning them yourself or having given one as a gift, you may not know that there are different types. Each type has its own set of rules and also different ways that they can be used.

I Bonds are saving bonds that are low-risk and also a liquid savings product. During the time that you own them they earn interest and also protect you from inflation.

I Bonds can be purchased at just about any local financial institution, or also through payroll deduction.

What are they used for? I Bonds savings bonds can be used to finance education, supplement your retirement income, or also given as a gift.

With I Bonds, you are guaranteed a real rate of return since they are an accrual-type security. Each month interest is added to the savings bond, and that interest is paid to you when you cash in the bond.

They are sold at face value. For instance, you pay $50 for a $50 I Bond.

You must own an I Bond for a minimum of one year, its interest-earning period is 30 years, and there are early redemption penalties. Interest earnings are tax-exempt from both State and local taxes, but they are subject to State and local estate, inheritance, gift, and other excise taxes. Interest earnings are subject to Federal income tax, but they may be excluded from Federal income tax when they are used to finance education.

Another type is the EE savings bonds. They are safe and low-risk savings bonds that pay interest based on market rates. As with I Bonds, EE savings bonds can be purchased at just about any financial institution or, if available, through your employer’s payroll deduction plan.

EE Bonds can be used to finance education, supplement your retirement income, or even given as a gift.

Any EE/E savings bond that were purchased between May 1997 and April 30, 2005 are set to earn a variable market-based rate of return. Those issued May 2005 and after are set to earn a fixed rate of interest.

EE savings bonds are also an accrual-type security, having interest added monthly and paid when it the bond is cashed in. However, unlike I Bonds, EE savings bonds are sold at half of its face value. For example, a $50 bond is purchased for $25.

There is a minimum of one year ownership, a 30-year interest period, and also early redemption penalties. The Tax Considerations for EE savings bonds are the same as those for the I Bonds.

Lastly are HH savings bonds. Unlike both I and EE savings bonds, HH are used only to supplement retirement income. They are available only in exchange for Series EE/E savings bonds or upon reinvestment of any matured Series H bonds.

As with I Bonds, HH savings bonds are sold for its face value. For example, you pay $500 for a $500 bond. HH/H savings bonds pay a fixed interest rate that was set on the day it was purchased. The interest rate will change to the current HH Bond rate on the 10 th anniversary of its issue date.

You must own HH savings bonds for a minimum of 6 months, and the interest-earning period is 20 years.

Interest earnings for HH savings bonds are exempt from State and local income taxes. However, they are subject to Federal, State, and local estate, inheritance, gift, and other excise taxes. Its interest earnings are also subject to Federal income tax.

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