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Answer:
Dear
Eric,
As
you've noted, I Bonds can be purchased through the
government's Treasury Direct program at www.TreasuryDirect.gov.
They can also be purchased from most banks and credit
unions and also via payroll deduction plans.
They're
a kind of hedge against inflation for Everyperson
that is free from federal income tax.
Background
In
September 1998, the U.S. Treasury began selling savings
bonds with interest rates adjusted for inflation.
I Bonds, as they're called, come with a government
guarantee that your return will outpace inflation.
Of course, this will happen only if we're experiencing
inflation. Otherwise, the return is not particularly
impressive.
How
much they cost
These
bonds are sold at face value. That means you pay $50
for a $50 bond. If you buy them online you can purchase
any amount of $25 or more, to the penny. If you purchase
bonds at your bank, credit union or through a payroll
deduction plan, they come in denominations of $50,
$75, $100, $200, $500, $1,000, $5,000 and $10,000.
The
maximum you can purchase in one calendar year, regardless
of how you buy them, is $30,000.
$Tip:
The TreasuryDirect system also allows you to set up
and schedule regular monthly purchases for as little
as $25/month.
Caution:
If you redeem your I Bonds within the first 5 years,
you will forfeit the 3 most recent months' worth of
interest. After the 5 years, there is no penalty.
So don't plan to add these to your savings portfolio
if you think you'll need the money within 5 years.
Note:
Anyone with a valid U.S. Social Security Number
of Tax Identification Number can own I Bonds. However,
you must be 18 years old to set up an online account
at TreasuryDirect. Bonds can be owned jointly and
also given as gifts to anyone, including minors.
How
much they pay
These
bonds have two types of interest rates. The initial
or fixed rate, which lasts the entire length of the
bond and a rate adjusted twice a year based on inflation.
The
current fixed rate is 1%.
The
inflation-adjusted interest rate is based on the Consumer
Price Index.
I
Bonds are currently paying 3.39% -- that includes
both the 1% fixed rate and the inflation-adjusted
rate. A new rate will be announced November 1st.
The
bonds, which earn interest from the first day of their
issue month, are an accrual-type security. That means
they increase in value on a monthly basis and the
interest is paid only when you cash in the bonds or
when they reach maturity.
I
Bonds can grow in value with inflation-index earnings
for up to 30 years.
Tax
advantages
These
bonds come with true tax benefits.
(1)
The interest income, although taxable at the federal
level, is free from both state and local taxes.
(2)
You can defer reporting the accumulated interest
for federal purposes until you redeem your bonds or,
until they stop earning interest in 30 years from
their issue date.
(3)
Federal tax benefits are eliminated if you use
the bonds for approved educational purposes and at
the same time you meet all the government's many requirements
which include having an adjusted gross income below
a certain level. This plan is also explained on the
government's Web site (see below).
Details...
For
the current rate, call 1-800-BONDS or visit: www.savingsbonds.gov
BUYandHOLD
does not recommend any securities. The securities
mentioned above are being used for informational purposes
only and should not be regarded as an offer to sell
or as a solicitation of an offer to buy.
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