Can Savings Bonds Be Reinvested?

by Mike Parker

U.S. savings bonds are debt obligations of the federal government. There have been numerous issues of savings bonds since they were first introduced in 1935. As of the time of publication the U.S. Treasury only sells Series EE and Series I savings bonds. Investors who do not need current income from their savings bonds may wish to reinvest the proceeds from their maturing savings bonds into newly issued bonds.

EE Bonds

Series EE savings bonds are low risk debt obligations of the federal government. You can purchase electronic a Series EE bonds at its full face value to the penny in amounts of at least $25. You can redeem your Series EE bonds after 12 months, but there is a three-month interest penalty if you redeem these bond within the first five years. Paper Series EE bonds are purchased at 50 percent of their face value and can be redeemed for face value at maturity. The original maturity period on Series EE bonds varies with their issue date. Series EE bonds issued since June 2003 have had a 20-year original term. Series EE bonds stop earning interest after 30 years from issue.

I Bonds

Series I savings bonds can be purchased in either paper or electronic formats. Bonds in both formats are purchased for their face value. Paper Series I bonds are purchased in incremental denominations beginning at $50 while electronic Series I bonds are purchased to the penny in amounts of $25 or more. Series I bonds accrue interest through a combination of a fix rate and an inflation adjusted variable rate. Like Series EE bonds, you can redeem Series I bonds after 12 months, but you will be charged a three-month interest penalty on bonds held less than five years. Series I bonds can earn interest for up to 30 years.

Reinvestment

You can continue to earn interest on your savings bond investments by reinvesting the proceeds from the redemption of your maturing savings bonds into new issues of savings bonds. If you hold a treasury bill, note, or bond in the U.S. Treasury Department TreasuryDirect program, you can automatically reinvest proceeds from these maturing securities into another security of the same type and term.There is no similar automatic process for reinvesting U.S. savings bonds. You must redeem your bonds and then place a new order to purchase bonds for the amount you wish to reinvest.

Tax Consequences

Interest earned on Series EE and Series I savings bonds accrues on a tax deferred basis until you redeem them or they mature. Once you redeem your bonds you will be liable for income taxes on the interest, regardless of whether or not you reinvest the proceeds into new savings bonds. You may be able to exclude some interest from these U.S. savings bonds if you use the proceeds to pay for expenses associated with higher education.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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