US savings bonds, including Series EE and Series I, have federal tax on interest but not state or local tax. Series EE is a fixed interest bond, while Series I has a fixed rate plus variable inflation. Both have a 30-year maturity and must be held for 12 months before redemption. Series EE can be purchased at 50% of face value if paper, while Series I is always purchased at full face value. TIPS bonds are taxable, unlike savings bonds used for education.
Interest on savings bonds is taxable at the federal level but not at the state or local level. There are many types of US Treasury bills, including savings bonds called Series EE or Series I. Series E is an older version of Series EE and no longer pays interest. The government uses different methods to calculate the interest paid on the two series, each with its own fixed rates. Series EE is a fixed interest rate accrual bond, while Series I is an accrual bond earning a fixed rate plus a variable rate of inflation, based on the Bureau of Labor Statistics index called the Price Index consumption – urban (CPI-U).
A maturity bond is one in which interest is added to the value of the bond and paid when the bond is cashed. Federal tax on interest on savings bonds can be paid semiannually, annually, or when the bond is cashed, as elected by the taxpayer. EE Series Bonds are purchased at 50% of full face value if paper bonds are chosen, but at full face value if purchased electronically. In practice, this means that the buyer will buy a $100 USD (USD) paper bond for $50 USD, or a $50 USD electronic bond for $50 USD, both worth $100 USD at maturity. Series I bonds are purchased at full face value regardless of how they are purchased.
Both Series EE and Series I bonds are bonds with a 30-year maturity. The reason Series I bonds are always purchased at face value is that the rate of inflation is unknown and subject to markets, so the final value of the bond cannot be accurately predicted. Both sets of bonds must be held for 12 months before they can be redeemed. If the bondholder cashes the bond during the first five years, he will be penalized with three months’ interest. Both securities can be used in a program to finance education, in which case interest on savings bonds is waived.
The US Treasury offers another inflation-protected bond, the Treasury Inflation-Protected Security (TIPS) bond. Those looking to buy savings bonds, especially if the option exists to use savings bonds for education, should make sure they are buying Series I bonds, not TIPS. Unlike Series EE and Series I bonds, interest paid in the TIPS program is taxable even if used for education.
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