The U.S. Treasury's savings bond program was introduced in 1935 to encourage Americans to save money and invest in the American government. The Treasury has adapted to the times, however, and with rare exceptions, savings bonds are no longer printed on paper. The government sells savings bonds and other securities on its website.
Savings bonds now come in two versions: the Series EE and the Series I. Series EE bonds carry a fixed rate and are investments that are guaranteed to double in value over 20 years and expire after 30 years. The newer Series I bonds have both a fixed rate and a variable rate to keep up with inflation.
- The Series EE savings bond has a fixed interest rate of return.
- The U.S. government commits that Series EE bonds will double its face value by the 20-year maturity.
- The Series I savings bond has no guarantee of value at maturity.
- Series I bonds carry a fixed rate plus an adjustable interest rate based on inflation.
Series EE U.S. Savings Bonds
The better-known Series EE bond is a direct descendant of the Series E savings bond. The original Series E was known as the War Bond and helped finance the American participation in World War II.
Series EE bonds can be purchased with a face value of as little as $25. Face values are also available in penny increments over the base $25. So you could buy a bond for $25.32 if you desired. The maximum amount that one buyer can purchase in a year is $10,000. The bonds are issued to a single owner and cannot be sold in the secondary market.
Double Value Guarantee and Redemption
EE bonds come with a guarantee from the U.S. government to at least double in value over the term of the bond, which is commonly 30 years (although certain issues of EE bonds can have different maturities). In the usual case, after 20 years, the owner of the bond can redeem the principal or opt to let it collect additional interest for another 10 years beyond the doubling date.
Holders cannot redeem the bond before holding it for a year. After that anniversary, they may redeem at any time and will forego earning additional interest. If redeemed within five years of purchase, there is a three-month interest penalty imposed. Further, the minimum redemption amount is $25.
EE Series Interest Rate
The interest rate is fixed for 20 years at the time it is issued. The government may adjust the rate after the 20th year. Rates paid on series EE bonds are set twice a year, in May and November, and remain the same for all bonds issued during the following six-month period. As an example, for the six months ending April 2020, the interest rate on Series EE bonds was 0.10%.
The buyer of an electronic Series EE bond pays the full face value of the bond upfront. If compound interest does not double its worth in 20 years, the U.S. Treasury commits to making up the difference.
Interest income from EE bonds is exempt from state and local taxes but not from federal taxes. The owner may receive tax relief if the funds go to funding qualified higher education.
Series EE bonds issued before June 2003 were purchased at half the face value, with the promise that they would double to face value over 20 years. The interest for those older bonds is calculated on the payment amount, not on face value.
Series I U.S. Savings Bonds
Series I savings bonds are a relative newcomer, having been introduced in 1998. Unlike EE bonds, Series I bonds don't come with a guarantee to double in value over 20 years. Instead, Series I bonds are issued for a period of 30 years and have a rate of return that is fixed for the life of the bond plus an inflation-adjusted interest rate.
The adjustable rate is revised semi-annually, in May and November, and is based on the Consumer Price Index for All Urban Consumers (CPI-U). This CPI figure takes into consideration the products purchased by nearly 90% of the American population and is considered a better gauge of consumer spending. Series I bonds purchased during the six months ending October 2021, are paying 3.54% interest.
Buying Series I Bonds
The Series I bonds can be purchased directly from the U.S. Treasury. They also can be purchased via a tax return, using tax refund dollars. When using a tax return to buy Series I bonds, it is the rare case when the purchaser will receive a paper certificate.
There are also several similarities to Series EE bonds. Series I bonds can't be sold but can be redeemed early with a penalty of three months' interest if it's less than five years from the issue date.
Differences in the Series I Bonds
One potential bonus is that Series I bonds if used to pay the costs of higher education, may be exempt from federal taxes as well as state and local taxes—the bond must be redeemed and the proceeds used in the same calendar year to qualify.
The key difference between the two types of savings bonds is the adjustable rate. Series I bonds do not carry the same guarantee of doubling in value over 20 years, but they do have a built-in inflation adjustment.
What's the worst that could happen? The owner of a Series I bond could be hit with years of low inflation or even deflation, and fail to get the doubling in value over time.