U.S. Savings Bonds are a safe way of saving for college, but the investment returns are limited. The interest rates on savings bonds are typically less than the interest rates on bank CDs and money market accounts.
The interest on a savings bond may be tax-free if the savings bonds are used to pay for college or rolled over into a 529 college savings plan. The student’s parent must be the owner of the savings bond to qualify for the tax-free treatment.
Interest Rates
The interest rates for a savings bonds depends on the type of savings bond.
The main difference between Series EE and Series I savings bonds is in the interest rates.
Since May 2005, Series EE savings bonds have had fixed interest rates that last for up to 30 years. New interest rates are announced each May 1 and November 1.
The value of a Series EE savings bond is guaranteed to double in 20 years. If you bought $5,000 worth of Series EE savings bonds when the baby is born, they will be worth $10,000 when the child turns 20 years old. That’s the equivalent of a 3.5% annual yield.
The guarantee is implemented as an adjustment on the 20th anniversary of the purchase date. If you redeem the bond before the 20th year, the return on investment is just 0.1% per year.
Series I savings bonds combine a fixed interest rate with an inflation-adjusted variable interest rate. The inflation-adjusted interest rate is adjusted for inflation based on the non-seasonally adjusted Consumer Price Index (CPI-U) twice a year for up to 30 years. Interest is compounded semiannually.
Unlike Series EE savings bonds, Series I savings bonds are not guaranteed to double in value.
Purchase Limits for Savings Bonds
Individuals can purchase up to $10,000 in U.S. Savings Bonds per year. Couples can buy up to $20,000 in savings bonds annually.
The minimum purchase amount is $25. U.S. Savings Bonds can be purchased in increments of one penny.
The savings bonds are purchased online, through the U.S. Department of the Treasury’s web site, TreasuryDirect.gov.
How to Redeem a Savings Bond
U.S. Savings Bonds cannot be redeemed during the first year, except for owners who have been affected by a natural disaster.
If a U.S. Savings Bond is redeemed during the first five years, a penalty of three months interest will be subtracted from the redemption amount.
Paper bonds can be cashed in at a bank, credit union or other financial institution or by mail. Electronic bonds can be cashed in online, with proceeds transferred to the owner’s bank account.
Only the owner or co-owner of a savings bond can cash in the bond. Proof of identity may be required. If the owner has died, the beneficiary can cash them in, but they will be required to present a copy of the owner’s death certificate.
To determine the value of a U.S. Savings Bond, use the Savings Bond Calculator.
Taxes
The interest on U.S. Savings Bonds is exempt from state and local taxes. The federal income taxes are deferred until the bond is cashed in or matures, whichever comes first.
The interest on certain U.S. Savings Bonds is tax-free if used to pay for college or if the proceeds are rolled over into a 529 plan. The Education Savings Bond Program applies to Series EE savings bonds purchased in 1990 or a later year and all Series I savings bonds.
