30.14 Series EE Bonds

Series EE savings bonds give you an opportunity to defer tax; see below. EE bonds may only be purchased online from Treasury Direct at www.treasurydirect.gov . They must be held 12 months from the issue date before they can be redeemed. Bonds cashed in any time before five years are subject to a three-month interest penalty; see the Example below.

Series EE savings bonds with an issue date on or after May 1, 2005, earn a fixed rate of interest. Interest accrues monthly and is compounded semiannually. EE bonds issued from May 1997 through April 2005 continue to earn market-based interest rates set at 90% of the average five-year Treasury securities yields for the preceding six months; these rates change every May 1 and November 1. EE bonds issued before May 1997 earn various rates depending on the date of issue.

Caution

Timing Redemptions of Older EE Bonds

In the year you cash in a savings bond you could lose interest by cashing it in too soon. Interest accrues only twice a year on EE bonds issued prior to May 1, 1997. The accrual months depend on the month of issue. If you cash pre–May 1997 bonds before the accrual month that applies to your bond, you will lose interest (30.14).

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Deferring tax on savings bond interest.

Unless you report the interest annually, Series EE bond interest is deferred (4.29) until the year you redeem the bond or it reaches final maturity. When you redeem the bond, the accumulated interest is taxable on your federal return but not taxable on your state and local income tax return. If in the year of redemption you use the proceeds to pay for higher education or vocational school costs, the accumulated interest may be tax free for federal tax purposes (33.4).

Caution

All E Bonds and Some EE Bonds Have Reached Final Maturity

The last outstanding E bonds reached their 30-year final maturity by June 2010 and are no longer earning additional interest. If you are still holding any E bonds, you can redeem them for their value as of the final maturity date.

EE bonds that have reached final maturity after 30 years have also stopped earning interest (30.14).

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Interest accrual dates for Series EE savings bonds.

For EE bonds issued after April 1997, interest accrues on the first day of every month. For EE bonds issued before May 1, 1997, interest generally accrues on the first day of the issue month and the sixth month after the issue month. For example, if you own an EE bond issued in August 1995, interest accrues every August 1 (month of issue) and every February 1 (six months after the August issue month). An exception may apply for EE bonds issued from March 1993 through April 1995; the twice-a-year accrual rule just discussed applies unless monthly increases are needed to guarantee a 4% return.

When you cash a bond, you receive the value of the bond as of the last date that interest was added. If you cash a bond in between accrual months, you will not receive interest for the partial period. For example, if interest on a bond issued before May 1,1997 accrues in February and August, and you cash a bond in during July, you would earn interest only through February. By waiting until August 1 to cash the bond, you would earn another six months of interest.

Final maturity for savings bonds.

Do not neglect the final maturity date for older bonds. After the final maturity date, no further interest will accrue. No E bonds are still accruing interest. The last issued E bonds, those from June 1980, reached final maturity after 30 years in June 2010 and thus they, as well as all older E bonds, have ceased earning interest.

EE bonds issued in 1980 (the first year available) reached final maturity in 2010, 30 years after issue, after which no further interest has accrued. All EE bonds have 30-year maturities, so EE bonds issued in 1982 stop earning interest in 2012 after they have earned interest for 30 years, and EE bonds issued in 1983 will stop earning interest after the month in 2013 that is 30 years after issue.

Table 30-2 Savings Bond Maturity Dates

Accrual dates for Series HH bonds.

Taxable interest on HH bonds obtained before September 1, 2004 in exchange for savings bonds or savings notes accrues semiannually at a fixed rate. A fixed interest rate applies for the first 10 years you hold an HH bond and the rate is then reset for the next 10 years until final maturity 20 years after the date of issue. For HH bonds issued or entering an extended maturity period after 2002, the rate is 1.5% per year. Interest on HH bonds issued from March 1993 through December 2002 will retain their 4% rate until they enter extended maturity after the first 10 years, and will then earn 1.5% per year.