FastFacts: Series EE Bonds

The basics: U.S. Series EE Savings Bonds, sold at 50% of their face value and available in $50 to $10,000 denominations, are backed by the full faith and credit of the United States government. You can purchase them through some credit unions, other financial institutions, and payroll savings plans.

Interest rates: The terms for Series EE bonds have changed over the years, but these changes aren't retroactive, so a bond earns interest under the terms that were in effect when it was purchased.

Because EE bonds earn market-based rates, you can't be certain when a bond will reach face value. For example, a bond that earns an average of 5% will reach face value in 14½ years, while a bond that earns an average of 6% will reach face value in 12 years.

New EE bonds (issued on or after May 1, 1997) earn interest for up to 30 years, based on market yields for five-year Treasury securities. These new bonds don’t have a guaranteed minimum interest rate. However, if a bond doesn't reach its face value in 17 years, the Treasury will make a one-time adjustment to increase the bond's redemption value to its face value—which translates to a guaranteed minimum yield of 4.1%.

You can redeem EE bonds anytime after six months, but they're designed to be held for the long term. With new bonds, for example, if you cash in before you’ve held it for five years, you’ll incur a three-month interest penalty.

Taxes: The interest earned on EE bonds is subject to federal income tax, but not to state or local income taxes. You can elect to pay the federal tax annually as it accrues, or defer payment until you cash in the bond, or until it reaches final maturity.

For college education: If you purchased Series EE Bonds on or after January 1, 1990, and you use them to pay college tuition and fees, you may be able to partially or fully exclude the interest on their earnings from federal income tax. To qualify for the exclusion, you must meet specific conditions. Here are some of the major ones:

• You must redeem the bonds in the same calendar year that you pay tuition and fees.

• Bonds intended for your child's college education must be issued in a parent's name. If you already bought bonds in your child’s name, you can change their registration by filling out a form from the Savings Bond office.

• Your income cannot exceed the limits, which are increased annually for inflation, in effect the year you redeem the bonds. In 1997, married taxpayers filing jointly with modified adjusted gross incomes up to 76,250, and single taxpayers up to $50,850, are eligible for the full interest exclusion. Partial exclusions are available for married taxpayers with incomes up to $106,250, and for single taxpayers with incomes up to $65,850. Above these limits, the tax exclusion is eliminated.

For more information. Visit the Bureau of Public Debt’s Internet site at www.publicdebt.treas.gov. The site has comprehensive information on Series EE bonds, including a program to maintain an inventory of your bonds and several easy-to-use calculators for figuring a bond’s current redemption value.