Definition of the savings bond plan


What is a savings bond plan?

A savings bond plan is a workplace program that allows employees to purchase US savings bonds through payroll deductions. The money is set aside from each participant’s paycheck, and when enough money has accumulated, the company purchases a savings bond on behalf of the employee.

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 US savings bonds (Series EE and Series I) through payroll deductions.
  • Series EE bonds are guaranteed to at least double in value if held for 20 years.
  • Series I bonds are indexed to inflation; they earn a fixed interest rate plus an inflation rate that is calculated semi-annually (using the CPI-U).
  • Interest on Series EE and I savings bonds are exempt from state and local income taxes.
  • Purchased bonds can be registered for a single owner or multiple owners, or owners with a single beneficiary.

Understanding a Savings Bond Plan

In a savings bond plan, a fixed 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 can be registered for a single owner, co-owners, or a single owner with a single beneficiary, who will receive the bond upon the death of the bondholder.

There are two types of bonds available in most workplace savings bond plans, Series EE and Series I. The difference between the two is how interest is paid.

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 useful life that extends beyond the original maturity date, up to 30 years from issue. After 30 years, the bonds no longer bear interest.

Historically, these bonds could be purchased in denominations of $ 50, $ 75, $ 100, $ 200, $ 500, $ 1,000, $ 5,000, or $ 10,000 and purchased for half their face value; for example, a $ 10,000 EE bond would have cost $ 5,000. However, Series EE bonds are no longer issued on paper. They can now only be purchased electronically at face value in penny increments starting at $ 25.

Series EE bonds are no longer sold on paper and can now only be purchased at face value through the Treasury Department’s web system, TreasuryDirect.

Series I Bonds

Series I inflation-indexed bonds were introduced in 1998 and are intended to offer investors a more protective return on their purchasing power. In paper form, 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 purchased in penny increments beyond $ 25.

These bonds are purchased at their face value and obtain a fixed rate of return from the moment the bond is purchased 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.

Special Considerations

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 special taxes. However, the accrued interest is exempt from state or local income taxes.

An investor can postpone reporting the interest earned on the bond for federal income tax purposes until the bond is repaid, transferred to someone else, or no longer earns interest. When EE and I bonds reach maturity, they are automatically redeemed and accrued interest is reported for federal income tax purposes.

There are two methods an investor can use 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 occurs first. Based on the accrual basis, interest is reported each year as it accrues.

www.investopedia.com

READ ALSO:  Who is Joseph Schumpeter? What is it known for?
About the author

Mark Holland

Leave a comment: