Personal Finance 

Series EE Savings Bonds Explained

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When the United States issues treasury bonds, bills, and notes, they are asking you, the taxpayer, for a loan. In exchange for that loan, they pay you a set interest rate just as you pay credit card and mortgage companies a set interest rate to use their money.

Many of us as children received savings bonds as gifts. These were easy to purchase and used to offer an attractive rate of return but is that still true today? There are two types of savings bonds left: the I bond and the EE bond. We’ll leave the I bond for another time but let’s take a look at the EE bond.

How Does an EE Bond Work?

You can purchase an EE bond in any amount down to the penny but as of January 1st, 2012, you can only purchase them through the Treasury Direct website. You’re allowed to purchase a maximum of $10,000 worth of EE bonds annually.

EE bonds pay a fixed interest rate over the 30 year life of the bond. After 20 years the Treasury guarantees that the bond will double in value regardless of the fixed rate. The Treasury recalculates the interest rate for new issue bonds each May 1 and November 1. You can find the current rates by clicking here.

EE savings bonds are ultra-safe investments because they are backed by the full faith and credit of the United States. Unless the United States goes bankrupt, you cannot lose your principal investment. Finally, savings bonds are highly liquid.

You can redeem your bond after twelve months but if you redeem it prior to the first five months, you lose the last three months of interest payments. If you redeem your bond after five years there is no penalty.

Tax Advantages

Series EE savings bonds come with attractive tax advantages. First, they’re exempt from state and local taxes. Federal taxes are differed until redemption allowing the interest earned to grow tax free throughout the life of the bond.

Additionally, if you’re using your bond to pay qualified education expenses, you may end up with no Federal tax liability. Review IRS Form 8815 and Publication 970 to determine your eligibility for an exclusion of Federal taxes.

What’s the Catch?

Savings bonds are perfect for the individual investor who is looking for a safe, easy to understand investment product but along with that safety comes another problem: You might have a tough time earning enough interest to outpace inflation. Despite the fact that the Treasury guarantees the bond will double after 20 years, the annualized rate of return may still not outpace inflation.

Other investments, like municipal bonds or some investment grade corporate bonds or bond funds may offer a high degree of safety but pay higher rates of return and in the case of municipal bonds, have similar tax treatment. For education saving, state sponsored 529 plans or Coverdell plans come with the same tax advantages but may offer a higher return.

Although the safety of owning an EE bond might be desirable, in low interest rate environments, savings bonds are probably not the best way to put your money to work. High interest rate environments, like we saw in the early 1980s, made savings bonds a powerful and safe source of revenue.


Because the Treasury has changed the way savings bonds are issued and redeemed numerous times over the past 20 years and as early as the beginning of 2012, don’t trust any information you read outside of the Treasury direct website. Click here to read about savings bonds on their site.

{ 9 comments, please add your thoughts now! }

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9 Responses to “Series EE Savings Bonds Explained”

  1. DougW says:

    According to the Treasury Direct web site,for redeeming, the penalty is before 5 years not 5 months.

  2. sp0rus says:

    Thanks for the article. I’ve been trying to educate myself on different investments recently, and bonds are something that I haven’t had much exposure to. Most books just sort of gloss over them and say “Oh yeah, and there are bonds, you get a lower return, but they’re safer than stocks.” This post and some of your others on savings bonds and TIPS are helping me understand a little better.

  3. Sadie says:

    For certain savings bond can be confusing. Help is available via the Savings Bond Wizard via

    Comparing a $10,000 I Bond to EE Bonds purchased 01/2003,
    interest values are as follows as of 1/31/2012:

    the I Bond ($10,000) @ 4.68% earned $4,716 interest
    two EE Bonds ($5,000 ea) @ 1.19% earned $3,016 interest.

    **Note: I Bond produced $1,700 more interest**

    With current I Bond rates(thru 4/30/12) being @ 3.06% and EE bond @ .60% if I chose to cash either today, obviously it would be the bond earning the least amount of interest and not worry about the total value in 20 years.

    I consider Savings Bonds to be a far better investment than CD rates now being offered.

  4. Sadie says:

    Perhaps important to be aware:

    Joint Owner Names on a Series I Bond cannot be
    changed. Should need arise, the bond must be cashed & re-issued perhaps at even a lower interest rate!

  5. govenar says:

    I think EE bonds are pretty useless now, unless you’re sure you’re going to hold them 20 years to get the doubling. Even then, a CD might be better, unless you think rates aren’t going up in the next 20 years. But I am buying I bonds.

  6. Anonymous says:

    So as a monetary baby gift, what would be your best option.
    An I bond or cash contribution to parents 529 plan
    or EE bond cashed over 20 years later
    what are your thoughts Jim and others

    • Lottie says:

      Cash contributions into a 529 plan would be the best option. These funds can be used for educational expenses all the way through college, and can be transferred to another family member if needed.

  7. timparker says:

    Yes, a 529 or Coverdell plan is the best place to put educational money. A general rule of thumb is to use investment products for their intended purpose. Other than yield, there are other advantages to 529 plans that you don’t find in treasury bonds. In general, this is a terrible environment for treasuries.

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