Series EE Bonds are a non-marketable, interest-bearing savings bonds issued by the U.S. government. When you purchase this type of bond, you’re essentially lending money to the federal government, which promises to pay you back with interest. These bonds are guaranteed to at least double in value when held to their full term, making them a safe, predictable investment option for conservative investors.
Series EE Savings Bonds feature a fixed interest rate that you know at the time of purchase, which remains unchanged for at least the first 20 years. While they technically mature after 20 years, you can continue earning interest for up to 30 years total. This extended earning period provides you with flexibility in your investment timeline.
These bonds are particularly attractive if you’re looking for simple, safe, and affordable investment options. You can purchase them in various denominations, making them accessible regardless of your budget. Plus, they come with certain tax advantages that might benefit your financial strategy when it comes to saving for education.
Overview of US Series EE Bonds
Series EE bonds are government-backed securities offering a safe investment option with guaranteed returns over time. These bonds serve as a low-risk way to save money while supporting the U.S. government.
Definition and Purpose
Series EE Savings Bonds are non-marketable, interest-bearing savings bonds issued by the U.S. government. When you purchase these bonds, you’re essentially lending money to the federal government. In return, the government pays you interest over the bond’s life.
The primary purpose of EE bonds is to provide a safe, long-term investment option. One of their most attractive features is the guarantee to double in value after 20 years. This means if the fixed interest rate wouldn’t double your investment in that timeframe, the Treasury makes a one-time adjustment at the 20-year mark. Series EE Savings Bonds are designed to be accessible to most Americans, making them an ideal savings vehicle for education expenses.
Issuance and Validity
Series EE Bonds are currently issued electronically through the TreasuryDirect website. Prior to 2012, paper EE bonds were available, but now they can only be purchased in electronic form except when using tax refunds, much like I Bonds.
You can buy these bonds in any amount from $25 to $10,000 per calendar year. The interest on EE bonds compounds semiannually, meaning every six months the Treasury applies the bond’s interest rate to a new principal amount that includes previously earned interest.
EE bonds have a 30-year maximum lifespan. You must hold them for at least one year before redemption, and if you cash them in before five years, you’ll forfeit the last three months of interest as an early withdrawal penalty.
The current fixed interest rate for EE bonds is periodically adjusted and published by the Treasury Department.
Purchasing and Valuation of EE Bonds
Acquiring U.S. Series EE Savings Bonds involves specific purchasing methods, cost considerations, and understanding how these investments grow over time. The process is designed to be accessible to individual investors seeking a low-risk government-backed security.
How to Purchase
You can buy Series EE bonds through the TreasuryDirect website, the U.S. government’s official portal for purchasing treasury securities. Creating an account is straightforward and requires basic personal information.
Unlike in previous decades, paper EE bonds are no longer available for purchase at financial institutions. All new Series EE bonds are issued electronically and stored in your TreasuryDirect account.
The minimum purchase amount is $25, making these bonds accessible to most investors. There is also an annual purchase limit of $10,000 per person per calendar year. You must provide your Social Security Number when purchasing bonds. This ensures proper tax reporting since the interest earned is subject to federal income tax.
Denominations and Costs
Series EE bonds are sold at face value in electronic form. This means you pay exactly what the bond is worth initially—$25 for a $25 bond, $100 for a $100 bond, and so on.
The flexibility in denominations makes EE bonds useful for targeted savings goals like education expenses or supplemental retirement income. When purchasing, the full amount is debited from your linked bank account. There are no additional fees or commissions when buying directly through TreasuryDirect.
Interest Rates and Calculation
Series EE bonds earn interest monthly and continue accumulating interest for 30 years from the issue date. The U.S. Treasury guarantees that EE bonds will at least double in value after 20 years, even if the fixed interest rate would not achieve this naturally.
The Treasury sets a fixed rate when you purchase the bond. This rate remains constant throughout the bond’s life, providing predictable returns regardless of market fluctuations.
Interest is compounded semiannually, meaning twice a year the interest earned is added to the principal value of your bond. This compounding effect accelerates growth over time.
You can check your electronic bonds’ current values by logging into your TreasuryDirect account. For older paper bonds, the Treasury provides an online calculator to determine current values based on issue date and denomination.
Redemption and Taxation for EE Bonds
Understanding when you can cash in your Series EE bonds and how they’re taxed is crucial for maximizing your investment. The federal government offers certain tax advantages that make these bonds particularly attractive for specific financial goals.
Redemption Rules
You can cash your EE savings bonds any time after you’ve owned them for 1 year. However, waiting longer typically yields greater returns as interest continues to accrue.
If you redeem your bonds before they’re 5 years old, you’ll forfeit the last 3 months of interest as an early withdrawal penalty. This penalty doesn’t apply to bonds held for 5 years or more.
EE bonds earn interest for up to 30 years from the issue date. After this period, they stop earning interest, making it counterproductive to hold them longer.
To redeem paper bonds, visit a financial institution where you have an account. For electronic bonds, you can cash them through your TreasuryDirect account with proceeds deposited directly to your linked bank account.
Tax Considerations
Interest from EE bonds is taxable at the federal level but exempt from state and local income taxes. This provides a meaningful tax advantage compared to many other investments if you live in a state with income taxes.
You have two options for reporting interest for tax purposes. You can either report the interest annually as it accrues or defer reporting until you redeem the bond, the bond matures, or you dispose of it in some other way.
Most bondholders choose the deferral method, which postpones tax liability until redemption. This can be particularly advantageous if you expect to be in a lower tax bracket when cashing the bonds.
A special education tax exclusion may allow you to avoid paying federal income tax on your bond interest if you use the proceeds for qualified higher education expenses. This benefit is subject to income limitations and other specific requirements.
Advantages and Risks
U.S. Series EE Bonds offer several important benefits for investors seeking stable returns, but they also come with limitations that might impact your financial goals.
Investment Security
EE bonds provide exceptional safety for your savings. These bonds are backed by the full faith and credit of the U.S. government, making them one of the safest investment options available.
You’ll benefit from guaranteed returns, as EE bonds double in value when held for 20 years, which equates to a fixed return of about 3.5% annually. The tax advantages are significant. Your earnings are exempt from state and local taxes, and federal taxes can be deferred until you redeem the bond, or it reaches maturity.
For educational purposes, the interest may be completely tax-free if used for qualified higher education expenses and you meet income requirements.
Potential Drawbacks
The long-term commitment can be challenging. To receive the guaranteed doubling benefit, you must hold your EE bonds for 20 years. Early redemption results in significantly lower returns.
Liquidity is limited as you cannot cash in these bonds during the first 12 months of ownership. Redeeming before five years incurs a penalty of three months’ interest. This bond is meant for long term education planning.
The fixed interest rate structure means your returns won’t increase if market rates rise. This could result in your investment not keeping pace with inflation during periods of higher price increases. If the average inflation rate exceeds 3.5% you would have less purchasing power at maturity (before taxes).
Final Thoughts
If you are investing for your children’s education expenses, EE Bonds may be beneficial for long term planning as they are very safe. If you are thinking about your entire portfolio and are potentially near retirement, I Bonds are a much better option as they are a great inflation hedge due to their return structure. EE Bonds provide a much lower return throughout the holding duration of both bonds, it should be considered only for the most conservative investors.