U.S. Savings Bonds

THE Treasury Department has overhauled good old U.S. Savings Bonds to make them more enticing, Are the bonds better investments than before? They certainly are and they offer often overlooked tax breaks.

Until fairly recently, series EE bonds, which you can buy for $25 to $5,000, weren't paying much interest compared with other bonds. To get the maximum annual yield of 9%, you had to keep a bond for eight years. You would earn less if you cashed it in earlier.

Now, however, the return on EE bonds held five years or longer fluctuates with market interest rates. The bonds' return is 85% of the average yield of five year Treasury notes and bonds. In mid 1989, the rate was 7.8 1 %. There's also a nice extra: to protect you against sharp interest rate drops, EE bonds are guaranteed to pay a yield of at least 6%, provided you hold them for the full five years. Trouble is, you collect no semi annual interest checks. All the interest is paid when you cash in the bond in five years.

But that interest is exempt from state and local taxes, and you pay no federal tax until you cash in the bonds. Even then, you can defer the tax by swapping series EE issues for series HH bonds, which you can get for $500 all the way up to $ 10,000. The interest on series HH bonds 6% paid twice a year is taxable annually, but you are still postponing payment of taxes on your series EE bonds' interest and using tax deferred dollars to earn interest on series HH bonds.