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Investing in EE (Patriot) Bonds

EEs and Patriot bonds are one and the same. The word Patriot was added to some, but not all, EE bonds in 2001. According to the Treasury, "Patriot Bonds offer Americans one more way to express their support for our nation's anti-terrorism efforts."

Whatever you want to call them, however you wish to express your support, EE bonds are the most traditional kind of savings bond. They're the kind most people think of when they think savings bonds. Series EE bonds carry a face value of twice what you purchase them for. They are accrual bonds, which means that they accrue interest as the years roll on even though you aren't seeing any cash. You can pay taxes on that interest as it accrues, but in most cases it makes more sense to defer paying the taxes until you decide to redeem the bond. Uncle Sam allows you to do that.

Series EE bonds issued prior to May 2005 pay various rates of interest depending on the date of the bond. Most of these rates of interest are based on fairly complicated formulas and fluctuate over time. If you own a pre-May 2005 savings bond and you aren't sure what kind of interest the bond is paying, the best thing to do is to look it up on TreasuryDirect, under the link "Savings Bond Rates." EEs issued in May 2005 or afterward pay a fixed interest rate. At the time this paragraph is being typed, that rate is 3.60 percent. There's no telling what it will be when you read this, but it will be definitely be modest.

EE bonds are nonredeemable for the first year you own them, and if you hold them fewer than five years, you surrender three months of interest. EEs are available in eight different denominations, from $50 up to $10,000. Any individual can buy up to $30,000 in EE savings bonds a year (or a face amount of $60,000).

If you use your savings bonds to fund an education, the interest may be tax-free.

Historically, savings bonds have paid a rate of interest that has barely kept up with inflation. Therefore, you don't want to make them a major part of your investment scheme. If you already have savings bonds, you may want to consider swapping them for a higher yielding investment. If you wish to keep them, consider opening an account at TreasuryDirect and turning your paper bonds into electronic securities. That way, you won't need to worry about them getting lost or destroyed.

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