What Is a Series EE Bond?
A Series EE bond is a type of non-marketable, interest-bearing U.S. government savings bond within the broader category of Government Securities. Issued by the U.S. Department of the Treasury, these bonds are designed as a safe, long-term investment vehicle for individual investors. Series EE bonds earn a fixed rate of interest rates that is set at the time of issuance and accrues monthly, compounded semiannually. These bonds are guaranteed to at least double in value over their initial 20-year term, even if the fixed interest rate alone would not achieve this. The U.S. government backs Series EE bonds, making them one of the lowest-risk investment options available.
History and Origin
The concept of U.S. Savings Bonds dates back to 1935, when President Franklin D. Roosevelt signed legislation creating the first "baby bond" to encourage saving and broader public participation in government financing. These early bonds, such as Series E bonds, were instrumental in funding significant national endeavors, including World War II. The Series EE bond was introduced in 1980, evolving from its predecessors to offer a fixed interest rate and a guarantee to double in value over 20 years. Initially, paper Series EE bonds were common, but since 2012, new Series EE bonds are sold exclusively in electronic form through TreasuryDirect, the U.S. Treasury's online platform.10,9
Key Takeaways
- Series EE bonds are low-risk U.S. government fixed income securities available only in electronic form.
- They earn a fixed rate of interest for up to 30 years, compounded semiannually.
- The U.S. Treasury guarantees that a Series EE bond will at least double in value over its initial 20-year term.
- Interest earned is exempt from state and local income taxes but subject to federal income tax, often tax-deferred until redemption or maturity.
- Bonds can be redeemed after 12 months, but cashing them in before five years results in a forfeiture of the last three months of interest.
Interpreting the Series EE Bond
A Series EE bond is interpreted primarily by its guaranteed value growth and its role as a secure, long-term savings tool. Unlike marketable securities such as Treasury Bills, Series EE bonds are non-transferable and cannot be traded on secondary markets. Their value continuously increases through the process of accrual, where earned interest is added to the bond's principal every six months. This compounding effect ensures consistent growth. The guaranteed doubling of value in 20 years provides a clear benchmark for investors, offering predictability rarely found in other investments.8
Hypothetical Example
Suppose an investor purchases a Series EE bond for $1,000 through TreasuryDirect. This bond would earn a fixed interest rate, for example, 2.70%, for its first 20 years. The bond's value would grow monthly, with interest compounded semiannually. Even if the fixed rate does not lead to a doubling of the initial investment within 20 years, the U.S. Treasury guarantees that the bond's value will be at least $2,000 at the 20-year mark. The bond continues to earn interest for a full 30 years from its issue date. If the investor holds the bond past 20 years, it continues to earn interest at a potentially new rate until its maturity date at 30 years or until it is redeemed.
Practical Applications
Series EE bonds are commonly used for long-term financial planning goals. Their stability and government backing make them suitable for:
- Education Savings: Interest from Series EE bonds may be tax-exempt at the federal level if used to pay for qualified higher education expenses, subject to certain income limitations. This potential tax benefit makes them attractive for college savings.
- Retirement Savings: As a low-risk component, Series EE bonds can complement a diversified retirement portfolio, providing a safe growth vehicle.
- Emergency Funds: While they have a 12-month minimum holding period, their safety and predictable growth can make them a suitable, albeit less liquid, component of a long-term emergency fund.
- Gifts: Series EE bonds can be purchased as gifts for children or grandchildren, serving as a foundational savings tool.
The federal tax implications of Series EE bonds, including the potential for tax-exempt interest for qualified educational expenses, are detailed in publications from the Internal Revenue Service.7,6
Limitations and Criticisms
Despite their safety, Series EE bonds have certain limitations. One primary criticism revolves around their relatively low yield, particularly in periods of low interest rates. While the 20-year doubling guarantee provides a floor, the fixed rate may offer less growth than other investments, especially when inflation is high. For example, bonds issued since May 2005 earn a fixed rate set semiannually by the Treasury, which can be modest.5
Another limitation is their illiquidity in the short term, as they cannot be redeemed for at least one year. Redeeming them before five years incurs a penalty equal to the last three months of interest, which diminishes their short-term attractiveness. Additionally, because they are non-marketable, investors cannot sell them to another party if they need cash quickly; they must be redeemed through TreasuryDirect.
Series EE Bond vs. Series I Bond
Both Series EE bonds and Series I bond are U.S. government savings bonds, but they differ significantly in how their interest is calculated and their protection against inflation.
| Feature | Series EE Bond | Series I Bond |
|---|---|---|
| Interest Rate | Fixed rate, set at purchase | Combination of a fixed rate and a variable inflation rate |
| Inflation | No direct adjustment for inflation; relies on fixed rate and 20-year doubling guarantee | Protects capital gains and principal from inflation through variable rate |
| Doubling | Guaranteed to double in 20 years | Not explicitly guaranteed to double; growth depends on rates |
| Primary Use | Long-term, low-risk savings with predictable growth | Protection of purchasing power in inflationary environments |
Series EE bonds offer a predictable growth path based on their fixed rate and doubling guarantee, whereas Series I bonds adjust their rates every six months to account for inflation, making them more attractive in periods of rising prices.
FAQs
How much can I invest in Series EE bonds?
You can purchase up to $10,000 in electronic Series EE bonds per Social Security Number per calendar year.4
When can I cash in a Series EE bond?
You can cash in a Series EE bond after 12 months from the issue date. However, if you redeem it before five years, you will forfeit the last three months of interest.3
Is the interest on Series EE bonds taxable?
Interest earned on Series EE bonds is exempt from state and local income taxes but is subject to federal income tax. You can choose to report the interest annually or defer reporting it until the bond matures or is redeemed, whichever comes first.2 Additionally, interest may be excluded from federal income tax if used for qualified higher education expenses, subject to specific income requirements.
Do Series EE bonds ever stop earning interest?
Yes, Series EE bonds stop earning interest after 30 years from their issue date. At this point, they have reached their final maturity date.1