You can choose to have some of your plan contribution put into U.S. Savings Bonds. Although every dollar that you deduct for the bonds reduces your net pay by a dollar, the interest earned is not taxed until you cash them in. By not paying taxes on the interest earned and credited over the life of the bonds, you receive a greater benefit from compounding. You can obtain significant tax benefits when you cash in U.S. Savings Bonds to pay for a dependent's college tuition.

There are several advantages to investing in U.S. Savings Bonds. If you know you will not touch the money for at least one year, savings bonds will provide a fair return without risk. As a U.S. Savings Bonds owner, you will receive tax benefits, you can obtain inflation protection by purchasing certain bonds, and you may be eligible for enhanced tax benefits if you use certain bonds for education.

Three different types of U.S. Savings Bonds are currently available: Series EE, Series I, and Series HH. The interest on all these bonds is exempt from state and local taxes, and you can defer paying federal tax on Series EE and I Bonds until they are cashed. You may also be able to permanently exclude the interest on certain EE and I Bonds from federal tax if you cash the bonds and use the money to pay qualified educational expenses.

Series EE Bonds
EE Bonds are issued for half of their face value. For example, a $100 bond is purchased for $50 and is guaranteed to be worth at least its face value of $100 in 20 years. The interest rate paid on the bonds varies; it is pegged at 90 percent of the average yield on five-year U.S. Treasury securities. The bonds increase in value monthly, and interest is compounded semiannually. EE Bonds stop earning interest after 30 years, but they may be exchanged for Series HH Bonds at that time or earlier. Bonds may be cashed anytime after 12 months. There is a three-month interest penalty for bonds cashed within five years.

Series EE Bonds are available in eight face-value denominations, from $50 to $10,000. You may purchase up to $10,000 of these bonds (costing $5,000) each calendar year.

Series I Bonds
I Bonds are issued at face value, so a $100 bond costs $100. The interest rate is a combination of a small fixed rate (determined at issuance and fixed for 30 years) and a variable inflation rate (adjusted every six months based on the Consumer Price Index for All Urban Consumers, or CPI-U). There is no guaranteed increase in value; however, if there is significant deflation, the bonds are guaranteed not to lose value. The value of each bond is determined monthly, and interest is compounded semiannually. There is a three-month interest penalty for bonds cashed within five years.

Series I Bonds are available in seven face-value denominations, from $50 to $5,000. You may purchase up to $10,000 of these bonds (costing $5,000) each calendar year. I Bonds may not be exchanged for other series bonds.

Series HH Bonds
As of September 1, 2004, the U.S. Treasury is no longer issuing HH/H Savings Bonds. Investors are no longer able to reinvest HH/H Bonds or exchange EE/E Bonds for HH Bonds.

Much more detailed information about U.S. Savings Bonds, including current interest rates and redemption values, may be found at http://savingsbonds.gov.