What is Savings Bond Plan
A savings bond plan is a workplace program that allows employees to purchase U.S. savings bonds, such as the Series EE and Series I bonds, through payroll deductions. Money is set aside from each participant’s paycheck, and when enough money has accumulated, the company purchases a savings bond on the employee's behalf. The plan may only be available to certain employees, such as those who work for the company full time.
BREAKING DOWN Savings Bond Plan
In a savings bond plan, bonds may be registered to a single owner, co-owners or a single owner with a single beneficiary who will receive the bond upon the bondholder's death.
There are two types of bonds available in most workplace savings bond plans, Series EE and Series I. The difference between the two is the way in which they pay interest. Series EE bonds, which were first issued in 1980, are guaranteed to at least double in value over the initial term of the bond, typically 20 years. Most Series EE bonds have a total interest-paying life that extends beyond the original maturity date, up to 30 years from issuance. After 30 years, the bonds no longer earn interest. Series EE bonds can be purchased in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 or $10,000 and can be purchased for half of their face value; for example, a $10,000 EE bond would cost $5,000. Series I bonds can be purchased in denominations of $50, $75, $100, $200, $500, $1,000 or $5,000 with a purchase price equal to the denomination.
Inflation-indexed Series I bonds were introduced in 1998, and are intended to give investors a return plus protection on their purchasing power. Series I bonds are purchased at face value and earn a combined rate: a fixed rate of return from the time of the bond’s purchase and an inflation rate that is calculated twice a year based on the Consumer Price Index for All Urban Customers. Like EE bonds, I bonds can earn interest for up to 30 years.
Tax Treatment of Savings Bonds
The interest on Series EE and I savings bonds is subject to federal taxes, as well as state and local estate, inheritance, gift, and other excise taxes. However, the interest earned is exempt from state or local income taxes. An investor can postpone reporting the bond's accrued interest for federal income tax purposes until the bond is redeemed, transferred to someone else, or stops earning interest. When EE and I Bonds reach maturity, they are automatically redeemed and the interest earned is reported for federal income tax purposes.
There are two methods an investor may employ to report interest for federal income tax purposes: cash and accrual. Using the cash basis method, federal tax is deferred until the year of the bond’s final maturity, redemption, or other taxable disposition, whichever is earlier. Under the accrual basis, interest is reported each year as it accumulates.