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All About I Bonds

Bonds that pay more 6% for 30 years? An I-Bond refresher is in order.

Helen Modly, 06/01/2006

So far this year, I have had both a new client and another advisor tell me that they own U.S. Savings I bonds that are paying more than 6% for 30 years. Perhaps a refresher on I Bonds is in order.

What are I Bonds?

I bonds are one of the two types of U.S. Savings bonds currently available for purchase; the EE bond being the other. All savings bonds are non-marketable securities, meaning that the transfer of these bonds is restricted and they cannot be used as collateral. They are issued and backed by the full faith and credit of the U.S. government. The interest on both of these bonds is federally taxable and exempt from state and local taxes.

How are I Bonds structured?

I Bonds are an inflation-indexed accrual security purchased at face value and maturing in 30 years. These bonds earn a composite interest rate made up of a fixed rate set when the bond is purchased and a variable rate that changes semi-annually on the bond's six-month anniversary dates (from the date of issue). The interest is accumulated monthly and compounded semi-annually.

How are I Bonds purchased?

I Bonds are issued either electronically or in paper form. They are issued at face value ($1,000 buys a $1,000 bond). An individual can purchase up to $30,000 of paper I Bonds and $30,000 of electronic I Bonds each year. They can be purchased at www.treasurydirect.gov or at one of 40,000 financial institutions nationwide authorized by the Treasury.

Paper I Bonds can be purchased by and registered to an individual, as co-owners where either owner may cash the bond without the other's knowledge or consent, or with one owner and one beneficiary. Electronic I Bonds can be purchased and registered to an individual or to two individuals where one is the primary co-owner who may cash the bond, and the other co-owner who may only cash the bond if the primary owner grants the right to do so. They may also be issued where one person is the owner and another is the beneficiary.

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