In light of the popularity and favorable tax advantages of 529 Plans, does anyone even consider Series I and EE savings bonds anymore? Not much, for the most part. Assets have steadily flowed out of such vehicles into 529 Plans over the recent years.
However, these 30 year government-backed bonds are still good savings vehicles that may make sense to consider in certain instances, especially for more conservative investors. The bonds offer tax-deferred growth and partial or full exclusion from federal income tax when proceeds are used for tuition at an eligible post-secondary institution.
Series EE Bonds
Pros
- Interest is exempt from state and local taxes.
- Can be purchased at a "discount" (less than face value).
- Government securities are low-risk savings options.
- Series EE bonds may be totally tax free if the interest is used for a child's education.
- Series EE bonds may be available through payroll deduction.
Cons
- The smallest initial investment for a T-bill is $10,000.
- You must pay federal tax on your interest earnings.
- The interest rate on Series EE bonds is no longer fixed but varies; newer bonds have a 4 percent minimum return.
- Once bonds mature they no longer earn interest.
Series I Bonds
Series I bonds are a good alternative to Series EE Savings Bonds. Series I Bonds are sold at face value, while Series EE Savings Bonds are sold at half their face value and mature gradually to face value over time. You can buy Series I bonds in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000, for a total of $30,000 of paper bonds each calendar year, and an additional $30,000 worth of electronic I bonds each calendar year.
Compare Series I and EE Bonds to 529 Plans, UGMAs and Coverdell ESAs
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How Do I Buy Series I Savings Bonds?
You can purchase Series I savings bonds at most banks and other financial institutions, or through employer-sponsored payroll savings plans. You can also use the payroll feature in Treasury Direct to purchase bonds through your TreasuryDirect account via direct deposit.
Can I Cash Series I Savings Bonds In Before Their Maturity Date?
You can cash Series I savings bonds in after 12 months, but if you cash them in within five years of purchase, you'll forfeit three months of interest as a penalty.
How Is Interest Calculated on Series I Savings Bonds?
Interest rates on Series I savings bonds are made up of two factors:
- a low fixed rate that remains the same over the life of the bond (1.2% as of mid-June, 2005)
- an adjustment, or kicker, for inflation (3.6% as of mid-June, 2005, for a total of 4.8%).
