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Series EE bonds are a type of low-risk U.S. savings bond that are guaranteed to double in value after 20 years. Because they are issued by the U.S. Treasury with a 30-year term, they are an excellent choice for those who are seeking long-term, ultra-low-risk investments.
What Are Series EE Bonds?
EE bonds pay a fixed rate of interest over their 30-year term, making them very easy to understand. The interest on series EE savings bonds is paid monthly and compounded twice per year. They are exempt from state and local income taxes, making them a great choice for investors who live in cities and states with high income taxes.
The interest rate for an EE savings bond is set at issue, and after 20 years the Treasury guarantees that the value of your bond value will have doubled.
This means that a $25 dollar bond will be worth $50 after 20 years—equaling an average annual interest rate of 3.527%. If the bond is redeemed before 20 years, the owner will receive the interest rate payments set at purchase, which may be greater than or less than 3.527% annually.
Here’s an important feature to remember about Series EE bonds: They cannot be redeemed within the first year of ownership. You must own an EE bond for at least five years to receive all of the interest due to you. If you sell an EE savings bond during years one through five, you forfeit three months of interest, much like you might with a certificate of deposit (CD).
Historically, EE bonds were structured differently. Series EE bonds purchased between 1997 and 2005 earned a variable rate of interest. They were sold at half of their par value—a.k.a. their face value—and grew to full value at maturity, similar to zero-coupon bonds.
How to Buy EE Bonds
The only way to buy EE bonds today is online via the TreasuryDirect website. At the website you can purchase, value and manage EE bonds as well as other U.S. government securities.
There are limits on how many EE bonds you can purchase each year. The minimum purchase amount is $25, and the maximum annual purchase amount is $10,000. Series EE bonds can be held by individuals, trusts, estate, corporations, partnerships and more, making owning U.S. savings bonds quite flexible.
How to Cash out EE Savings Bonds
To redeem your EE savings bonds, simply follow the instructions on the TreasuryDirect website. The cash can be credited to your checking or savings account within two business days. If you own paper EE bonds, they can be redeemed at most local financial institutions, like a bank or credit union.
When Do EE Bonds Mature?
EE bonds mature 30 years after the original issue date. Although you can cash out EE bonds after one year, they earn interest for 30 years and are guaranteed to double in value at 20 years, regardless of the current interest rate.
When Should You Cash out Your EE Savings Bonds?
After you’ve had your EE bonds for at least a year, you can cash them in anytime you want or need to. Keep in mind that you’ll owe three months of interest as a penalty if you do this before you’ve held the bond for at least five years.
Outside of that, you may choose to cash out your EE savings bonds strategically if the coupon or interest rate on new EE bonds exceeds 3.527%, the guaranteed rate series EE bonds earn if they’re held 20 years. If that happens, you might consider replacing the bond with the higher yielding new bond to optimize your long-term returns.
How Are EE Bonds Taxed?
EE bonds are exempt from state and municipal income taxes, unless they are willed to or inherited by someone else. You will owe federal income taxes on interest income earned on EE bonds. You can pay these one of three ways: annually, at maturity or when the bond is cashed. Just note that once you opt to pay taxes annually, you must keep paying them each year; you can’t switch to at maturity or when the bond is cashed. You may be able to avoid all taxes, including federal, on EE bonds, if you use them to pay for qualified higher education expenses.
The owner of an EE bond is liable for tax payments, regardless of who purchased it. This means if you received an EE bond as a gift, you are responsible for paying taxes on it. If an EE bond is co-owned, each owner is responsible for one-half of the tax liability.
I Bonds vs EE Bonds
Though they’re both federally issued bonds, I bonds and EE bonds differ in a few key ways that may make one a better fit for you than the other. Ultimately, whether you choose one over the other, or decide to purchase some of each type of bond, depends upon today’s interest rates and your expectations for future interest rates and inflation.
I Bond and EE Bond Similarities
- Both I bonds and EE bonds are sold at par value and earn interest that compounds semi-annually for 30 years.
- Both must be owned for 12 months before they may be redeemed. If you cash them out during the first five years, you forfeit three months of interest payments.
- You can buy any amount between $25 and $10,000 electronically each year.
- Series EE bonds and I bonds are both exempt from state and municipal taxes and may be completely tax exempt if used to pay for eligible higher education expenses.
EE Bond and I Bond Differences
- The interest rate on EE bonds is fixed for the life of the bond while I bond rates are adjusted to protect owners from inflation.
- EE bonds offer a guaranteed return that doubles your investment if held for 20 years. I bonds lack such a promise of returns, though you are guaranteed not to lose your principal.
- While both EE and I bonds are capped at $10,000 in digital purchases from the Treasury Department a year, you can get up to $5,000 in paper I bonds when you use your tax return to buy them. This brings the total amount of I bonds you can buy in a year to $15,000.
How EE Bonds Fit into a Low-Risk Investing Strategy
EE bonds can act as ultra-safe investments that offset risk in a more aggressive stock portfolio. But they’re also equally at home in more conservative portfolios designed simply to preserve capital while offering modest growth.
Regardless of why you include EE bonds, you can rest assured that they’re highly unlikely to be defaulted on, given that they’re issued by the U.S. government, notes Josh Simpson, an investment advisor representative at Lake Advisory Group in Lady Lake, Fla.
For the most risk averse investors, Simpson explains that an investor could invest half their assets in EE bonds, thereby ensuring that this portion of the portfolio would double in 20 years. Due to the $10,000 annual cap, however, you’d likely need to work toward transitioning this portion of your portfolio over time. You then might feel more comfortable investing the remaining half of your portfolio in riskier equities that may earn higher returns over time.
If you have a longer time horizon, however, you may be better served by more aggressive investments, even if you’re more risk averse, says Larry Mathis, CEO of Mathis Wealth Management in Phoenix. While the guarantee of a doubling of the principal is appealing, over a 20-year time frame other investments may offer greater growth potential.
