savings bonds

Tax Overhead
Top 5 Savings Bond Myths

1. When a savings bond reaches its face value – the amount printed on the front of the bond - it stops earning any additional interest.

Series EE bonds will continue to earn interest AFTER it reaches face value, for up to 30 years or until it is redeemed - whichever occurs first. Currently, series I bonds are purchased at face value and will earn interest for 30 years.

2. All types of savings bonds earn the same rate of interest.

Different types of series of savings bonds (E, EE, I, HH) are/were assigned different interest earning rates at the time they were purchased.

3. All savings bonds will keep the same interest rate throughtout the life of the bond.

Depending on when the bond was purchased and the series of bond, different rates, rules and formulas are applied. For example, EE bonds purchased 1997-2005 earn a variable interest rate that changes every 6 months. EE bonds purchased 2005 and after earn a fixed rate of interest. Series I bond rates are calculated by combining a fixed rate portion (which remains the same) with a variable rate portion (which changes every 6 months).

4. When the new savings bond interest rates are announced twice each year, these new rates become the interest rate for existing savings bonds.

The new interest rates only apply to new bond purchases.

Here is what happens to older bonds: Let’s assume an EE savings bond was issued on April 1, it was assigned an interest rate for the first six months of its life. On November 1, when a new bond was issued, a different interest rate was assigned to that bond. The interest rate from the November 1 and April 1 bond is averaged, and the April 1st bond has a new "blended interest rate". This process continues for every sixth month period. For EE bonds issued 2005 and after, bonds are assigned a fixed rate.

5. When an owner cashes in a savings bond, there is a "special tax rate" to calculate the taxes on the proceeds from the bond(s).

Savings bond interest is consolidated with other earnings and expenses on federal income tax returns and the resulting gross taxable amount is taxed at an "ordinary income tax" rate. Savings bonds are not subject to state and local taxes.
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