What Is a Series EE Savings Bond?

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DEFINITION

Series EE savings bonds are a type of savings bond issued by the U.S. Treasury that are guaranteed to double in value in 20 years. You can purchase a Series EE savings bond for $25 to $10,000.

Definition and Examples of Series EE Savings Bonds

Series EE savings bonds are an electronic savings bond issued by the U.S. Treasury. The bonds accrue interest until they are cashed in or mature after 30 years. The Treasury Department guarantees they will double in value after 20 years.

Savings bonds are considered safe investments because the U.S. government can use its authority to tax or inflate the money supply to pay them, and they are backed by “the full faith and credit” of the U.S. government.

Savings bonds also have tax advantages. Interest accrued on a Series EE savings bond is not subject to state or local tax. Federal tax on the interest can be delayed until the bonds are cashed in, or potentially avoided altogether if the savings bonds are used for eligible education expenses.

Because of their low risk, the interest rates on Series EE bonds are generally low. The interest rate is 0.10% per year as of 2022, but the Treasury Department guarantees that these bonds will double in value in 20 years. It will make a one-time adjustment to fulfill that guarantee if you hold the bonds that long.

Let’s say you buy $5,000 of Series EE bonds and hold them for 15 years. At the end of 15 years, your $5,000 would be worth $5,075.53, and the $75.53 of interest would be subject to federal income taxes. Waiting five more years would increase the value to $10,000 with the Treasury’s one-time upward adjustment.

How Series EE Savings Bonds Work

The Treasury no longer issues paper savings bonds. Savings bonds can only be purchased through the Treasury’s TreasuryDirect website. You can create an account and use it to purchase Series EE and other savings bonds, cash in bonds you currently hold, find the value of bonds you hold, or purchase a gift bond.

The Treasury sets the rate for Series EE bonds every six months, on May 1 and Nov. 1. For May 2022 through October 2022, the rate is 0.10%, which it’s been since November 2015. It hasn’t been above 1% since November 2011. Prior to 2005, the rate was set at 90% of the average yield of five-year Treasury bonds for the previous six months.

Interest is not paid out to investors like it would be with a traditional bond. It is accrued on the investors account and paid to them when the bond is cashed on the TreasuryDirect website.

Bonds must be held at least one year and can be held up to 30 years. If bonds are redeemed within five years of purchase, the investor forfeits the previous three months’ worth of interest. After five years, the investor does not forfeit any interest.

Alternatives to Series EE Savings Bonds

Series EE savings bonds are not the only choices for fixed-income investments that are issued by governments. Here are some alternatives that can provide similar benefits of lower risk and reliable returns.

Series I Savings Bonds

Series I savings bonds are similar to Series EE and both are sold on the TreasuryDirect website. Series I savings bonds provide interest based on the current inflation rate, so they are designed to minimize the risks of inflation. They have the same tax advantages as Series EE bonds. You can purchase paper versions of Series I bonds with your tax refund.

Treasury Notes and Bills

In addition to savings bonds, which have long-term maturity lengths of between 10 and 30 years, the Treasury also issues shorter-term notes and bills. Treasury notes are medium-term bonds with maturities between two and 10 years. Treasury bills are short-term bonds with a maturity of less than a year.

Treasury bonds and notes are fixed-principal securities that pay semiannual interest and repay the principal at maturity. Treasury bills are zero-coupon bonds, meaning they pay no interest but trade at a discount to their face value.

Interest rates for Treasuries are set at issuance, then float on the active market. Unlike savings bonds, investors can purchase and sell Treasuries on the secondary market.

Like savings bonds, Treasuries backed by the “full faith and credit” of the U.S. government are considered to have no credit or default risk.

Municipal Bonds

Municipal bonds, or munis, are similar to Treasuries, but are issued by government entities such as states, counties, cities, or villages to build public projects like roads or schools. Many munis pay tax-free interest to investors.

Munis generally are considered riskier than Treasuries because municipalities have less tax power than the federal government. Still, many munis are considered to be less risky than corporate bonds or other fixed-income investments.

Key Takeaways

  • Series EE savings bonds are issued by the U.S. Treasury.
  • Series EE savings bonds guarantee a double value for investors after 20 years.
  • The interest rate as of July 2022 is 0.10%.

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Article Sources

  1. U.S. Treasury. “Series EE Savings Bonds.”

  2. U.S. Treasury. “Treasury Bills.”

  3. FINRA. “U.S. Savings Bonds.”

  4. U.S. Treasury Department. “May 1997 Through April 2005 (EE Bond Rates and Terms).”

  5. U.S. Treasury Department. “Series I Savings Bonds.”

  6. FINRA. “U.S. Treasury Securities.”

  7. FINRA. “Municipal Bonds.”