What Is a Savings Bond Plan?
A savings bond plan is a workplace program that allows employees to purchase U.S. savings 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.
- A savings bond plan is a workplace program that allows employees to purchase U.S. savings bonds (Series EE & Series I) via payroll deductions.
- Series EE bonds are guaranteed to at least double in value if kept for 20 years.
- Series I bonds are indexed to inflation; they earn a fixed rate of interest plus an inflation rate that is calculated semi-annually (using CPI-U).
- Interest on Series EE and I savings bonds is exempt from state and local income taxes.
- Bonds purchased may be registered to a single owner or multiple owners, or owners with a single beneficiary.
Understanding a Savings Bond Plan
In a savings bond plan, a set amount of a participant's paycheck is set aside each period until there is enough money for the company to purchase a savings bond on behalf of the employee. These 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
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.
Historically, these bonds could be purchased in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, or $10,000 and be bought for half of their face value; for example, a $10,000 EE bond would have cost $5,000. However, Series EE bonds are no longer issued in paper form. Now they can only be bought electronically at their face value in penny increments starting at $25.
Series EE bonds are no longer sold in paper form and can now only be bought at face value via the Treasury Department's web-based system, TreasuryDirect.
Series I Bonds
Inflation-indexed Series I bonds were introduced in 1998, and are intended to give investors a return plus protection on their purchasing power. In paper format, they can be purchased in denominations of $50, $100, $200, $500, and $1,000 with a purchase price equal to the denomination. Electronic versions can also be bought in penny increments beyond $25.
These bonds are purchased at face value and earn 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 (CPI-U). Like EE bonds, I bonds can earn interest for up to 30 years.
Interest on Series EE and Series 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.