Investment Options:
Savings Bonds rates are announced every May and November 1st, and are calculated using a standard formula. Existing Series EE Bonds do not change their rates as new rates are announced. Series I Bonds do.The rate for Series EE Bonds is 90% of the average rate for 5-year Treasury Notes over the last six months.
The rate for Series I Bonds is a combination of a pre-determined fixed rate of return and an adjustment for inflation over the prior six months.
Tax Benefits:
The primary tax benefit for holders of U.S. Savings Bonds is the exemption from paying income tax on the interest and growth in value, if used for qualifying tuition. By design, Series EE and I bonds are also tax-deferred each year until they are cashed out.This exemption from income tax on the growth of these bonds makes them competitive with other higher paying, but taxable bonds, held outside other college accounts.
For example, assume a bond from a corporation is paying 5% annually, but is fully taxable at a Federal rate of 25% and a state rate of 5%. After taxes are paid each year, at a rate of 30%, that bond yields a net after-tax income of 3.5%.
If a U.S. Savings Bond is only earning 4%, but will never be taxed because it will be used for college tuition, it clearly outperforms the taxable bond.
To qualify for at least a partial exemption from taxation on the interest, the owner has to have an income under $78,100 if single, or $124,700 if married.
