How to Purchase U.S. Savings Bonds

• You can purchase U.S. Savings Bonds directly from the Treasury at TreasuryDirect (see Resources), which is the primary means the government uses to raise funds from the retail investor. Using TreasuryDirect, you can bypass commissioned brokers and purchase and hold savings bonds as well as Treasury notes, bonds, bills and Treasury Inflation-Protected Securities.
  
  

I-Series Savings Bonds

• I savings bonds are sold at face value, and pay regular interest payments. Interest compounds every six months for 30 years. I-series interest rates are also linked to the Consumer Price Index for Urban Areas, which helps protect your savings against the effects of inflation. You must purchase I-bonds in increments of $25 or more, but you cannot purchase more than $5,000 in any calendar year. If you redeem them within five years, you will pay a penalty of three months' interest. There is no penalty for redeeming bonds after five years.
  
  

EE-Series Savings Bonds

• EE bonds are low-risk investment and savings vehicles best suited for long-term savings. EE bonds purchased after May 1, 2005, earn a fixed rate of return, while EE bonds purchased between May 1998 and April 30, 2005, are linked to the yields on five-year treasuries and earn a variable rate, based on the market. The same three-months' interest penalty applies on EE bonds redeemed within the first five years.
  
  

Tax Treatment of Savings Bonds

• Treasury bonds are exempt from all state and local income taxes, which makes them attractive to residents of states with high income taxes. The interest received from savings bonds is reportable as income on your federal tax returns. You will receive an online Form 1099-INT, which will show the total amount of interest received. However, if you use the proceeds for qualified educational expenses, you may qualify for the Education Savings Bond Program.
  
  

Education Savings Bond Program

• The Education Savings Bond Program allows you to exclude interest earned from savings bonds from your federal income tax return. To qualify, you must spend money on qualified educational expenses in the same year in which the bonds were redeemed, you must have been 24 years old or older on the first day of the month in which you bought the bonds, the bonds must be registered in your or your spouse's name -- children can be named as beneficiaries, but not as co-owners -- if married, you must file a joint return, you must meet certain income requirements, and the educational institution must meet criteria for federal assistance.
  
  You can also buy bonds in the child's name. The child will be liable for income taxes. Most children are in lower tax brackets than their parents, however.