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EE/E Bonds Set to Change to Fixed Rate

In an press release today, EE/E Bonds [3] are going to be fixed-rate bonds starting on May 1, instead of variable rate as they have been for as long as I can remember. EE/E bonds have been great for those saving for college and the earnings are exempt from State and local taxes. They’re one of the popular safe methods of investing and they’re going to lose one of their great advantages, varying rates in a period of changing interest rates…

EE/E Bonds are great because you can invest anywhere from $50 to $30,000 for up to 30 years with your interest exempt from State and local income taxes (and Federal if you use it for eligible education expenses). You can hold it for as little of 1 year and as long as thirty years and only forfeit the recent 3 months of interest if you cash in before 5 years, no penalty after five years. The best part is that you earn a variable market-based rate of return, adjusted May 1 and November 1, which is based on 90% of the 6-month averages of 5-yr Treasury Securities market yields (rates explained [4]).

The change to a fixed rate of return on May 1 means that in this period of inevitable rising interest rates, you’re getting locked into a lower rate of return. This move will save the Federal government money. Right now you’re looking at a 3.25% interest rate that is about what you’d get on a good 2-year CD; if you factor in the exemption from State and local income taxes. If (more like when) rates go up, you’d be locked in so everyone better buy some EE/E bonds now or look for an alternative.