University of Wisconsin - Extension

MADISON, Wis.-"In today's low interest rate environment, if you are looking for safety with higher returns than money markets or certificates of deposit are paying, savings bonds may be an attractive alternative," says Linda Boelter, Family Financial Management Specialist for the University of Wisconsin-Extension.

However, savers and investors need to know that starting this month (February 2003), the minimum holding period for Series EE and Series I bonds has been extended from six to 12 months.

'The new holding period is designed to prevent purchasers from taking advantage of the current spread between savings bond returns and historically low short-term interest rates by cashing in bonds after six months," Boelter explains.

Savings Bonds are designed to be a long-term savings vehicle. If you purchase a new Series EE or I bond, you must hold on to the bond for 12 months before you can cash it. Also, Series EE bonds issued February 2003 and later must be at least 12 months old before they can be exchanged for Series HH bonds.

Older bonds-those issued in January 2003 or earlier-can still be cashed or exchanged when they are six months old. However, there is a three-month interest penalty if these bonds are redeemed before five years.

Currently Series EE savings bonds issued on or after May 1, 1997, are earning 3.25 percent. The rate is 90 percent of the average five-year Treasury securities yields for the preceding six months. A new interest rate is announced on May 1 and again on November 1 each year.

The current rate for Series I savings bond earnings rate is 4.08 percent. The rate is a combination of a fixed rate, which is in effect for the life of the bond, and the inflation rate. The 4.08 percent earnings rate for I Bonds bought from November 2002 through April 2003 will apply for the first six months after their issue. After that, the earnings rate will be the 1.60 percent fixed rate plus the inflation rate that is adjusted every six months.

Inflation-indexed I Bonds are designed to offer a way to save that protects the purchasing power of your investment by assuring a real rate of return above inflation. I Bonds are sold at face value in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000 and like Series EE bonds, they earn interest up to 30 years. Earnings are added every month and interest is compounded semiannually.

Savings bonds also offer tax savings, according to Boelter. They are exempt from state and local income. Federal income tax on earnings can be deferred until the bonds are cashed or they stop earning interest.

"If you own older savings bonds, you need to pay attention to their maturity dates because they may have stopped paying interest," Boelter cautions. Series E savings bonds issued from May 1941 through October 1962 or from December 1965 through October 1972 are no longer earning interest.

More information about United States Savings Bonds can be found on the website http://www.savingsbonds.com .