What are EE bonds? How do they work?

The beauty of EE bonds is that their face value increases by 100% when held for the long term.

What are EE bonds?

The United States Treasury offers investors several low-risk bonds that are backed by the “entire confidence and security” of the United States government. These bonds pay semi-annual interest and have the highest credit rating available, AAA. They are also considered liquid and therefore easily convertible into cash. As such, they are considered some of the safest investments available, since the US government is virtually guaranteed never to default.

Formerly known as Patriot Bondsthe original Series E Bonds are the ancestors of Series EE Bonds we know today. They were in paper format and sold as war bonds during World War II, earning interest until 2010. Most of these bonds were sold at a discount and are now worth face value plus accrued interest, which can be calculated using the bond bond. date of issue and serial number on the US Treasury website, TreasuryDirect.

The current generation of savings bonds, Series EE bonds, began in 1980. They are only available in electronic format. In addition to their face value, or face valueEE bonds offer an interest payment, or yield. These bonds are considered particularly attractive because they are guaranteed by the US government to pay double their face value after 20 years. This makes them an excellent investment for those who plan to keep them for the long term. They are also popular gifts, especially when used to fund higher education. We will discuss tax considerations in more detail below.

How do Series EE bonds earn interest?

Depending on the year you bought your EE bonds, they earn interest in different ways:

  • EE bonds issued after May 2005 pay a set, or fixed rate interest rate, which is announced by the Treasury Department twice a year: May 1 and November 1.
  • EE bonds issued from May 1997 to April 2005 earn interest on a variable base. This rate changes every six months.
  • EE bonds issued before May 1997 earn interest at different rates. See the TreasuryDirect website for more information.

What is the current interest rate on an EE bond? How do EE bonds earn interest?

The interest rate for EE bonds issued between May 2022 and October 2022 is 0.10%.

EE bonds start earning interest from the month you buy them. This interest is compounded on a semi-annual basis and added to the principal of the bond. EE bonds pay interest until they mature in 20 years or when you decide to redeem them.

The Treasury Department guarantees that at the time of redemption, if the face value of the bonds is not at least twice the purchase price, it will make a one-time adjustment to fulfill its guarantee.

How well do EE bonds react to inflation?

Bond prices have an inverse relationship with interest rates; when interest rates rise, prices fall. Typically, the Federal Reserve responds to inflation by raising interest rates, so during periods of inflation, bonds generally don’t add much value.

The US government recognizes that these savings bonds will not earn high yields in terms of interest rates; however, they attempt to compensate investors who make a long-term commitment to treasury bills with the guarantee of doubling their face value. The only question remains, will doubling your dollar investment keep up with inflation?

What category of cash do EE bonds belong to?

There are several categories of Treasury securities:

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  • Treasury bills, which mature in 1 year or less, and offer no interest payments
  • Treasury bills, which mature in 2, 3, 5, 7 or 10 years and pay interest semi-annually
  • Treasury bills, which mature in 20 or 30 years
  • Inflation-protected bonds, which are indexed to the rate of inflation as measured by the consumer price index (these include I bonds and Treasury inflation-protected securities)

Of the bonds listed above, there are two series of savings bonds: I bonds, which are available in electronic and paper format, and EE bonds, which are electronic only.

How do EE bonds differ from I bonds?

EE bonds and I bonds share several characteristics. This table provides details:

I Bonds Vs. EE Bonds

Source: TreasuryDirect.gov

I Bonds EE bonds

Format

Paper and electronic

Electronic only

Purchase price

Nominal value

Nominal value

interest

Composite rate (fixed + variable)

Fixed for bonds after May 2005

Maximum

$15,000

$10,000

Compound interest

Semiannually

Semiannually

Redemption

After 12 months

After 12 months

Penalties

Less 3 months if redemption before 5 years

Less 3 months if redemption before 5 years

The main difference between I bonds and EE bonds is how they earn interest.

EE bonds (when purchased after May 2005) pay interest on a fixed basis, while I bonds pay a combination of fixed and variable interest known as the composite rate.

Another difference between EE bonds and I bonds concerns the maximum purchase amount per year. The maximum allowed for I bonds is $15,000, of which $5,000 comes from the tax return. An investor is only allowed to purchase $10,000 of EE bonds in any given calendar year.

How do EE bonds differ from TIPS?

The principal of the TIPS is indexed to inflation as measured by the consumer price index. This means that they tend to outperform other bond classes when inflation is high, but in deflation they also lose more.

EE bonds are not indexed to inflation. Their rate is fixed and is set twice a year. It applies to all bonds issued during this period.

What are EE bonds worth at maturity?

The US Treasury Department guarantees that the EE bonds will be worth at least double their face value mature in 20 years. If the bond has not earned enough interest to be doubled, the Treasury Department will make a one-time adjustment to cover the difference.

Where can you trade EE bonds?

EE Bonds can be redeemed through the TreasuryDirect website. The amount will be credited to your bank’s current or savings account within two business days. You can also check with your bank to see if your EE bonds are eligible for redemption.

How are EE bonds imposed?

Interest on EE bonds is taxable at the federal level, but not at the state or local level. If you use the bonds for college education, the interest may be exempt from federal taxes.

Taxpayers can declare interest annually or they can defer the declaration of interest until they cash the bond, it matures, or they sell it. Use tax form 1099-T.

Can EE bonds be transferred to an IRA? Used for education? Gifted?

You can only add money to an IRA. Therefore, savings bonds such as EE bonds cannot be rolled over. However, you can cash in the bonds after they mature and add that money to an IRA.

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