Are Series EE Savings Bonds a Wise Investment?

If you invest in U.S. savings bonds, then you assume the same level of risk that people have when they put money in the bank. In other words, the default rate on savings bonds is quite small as each bond is backed by the full faith and credit of the U.S. government.

U.S. savings bonds are easy to get. Nearly every bank, savings and loan association and credit union issues them, but they’re also available for purchase online. But, keep this mind: as of January 1, 2012, paper savings bonds will no longer be sold at financial institutions. From then on, electronic savings bonds will be issued only for Series EE and I bonds. In 2004, the U.S. Treasury discontinued Series HH bonds. Switching to electronic only bonds will save the government about $70 million over the first five years.

I Bonds v. EE Bonds

Which savings bonds should you get? There is little difference between the two except in how interest is earned. Both can be issued in any of $25 or more including in penny increments. You pay face value for your bond and can purchase up to $5,000 per Social Security Number for EE and I savings bonds each. Savings bonds can be redeemed after 12 months, but there is a 3-month interest penalty if redeemed during the first five years.

Both bonds are exempt from state and local taxes, the U.S. Treasury reports interest payments through IRS form 1099-INT and there are tax benefits available when used for education purposes. Use your savings bonds to pay for college and you may be able to take the available tax exclusion. Income limits and other exclusions may apply.

Interest Earned

The difference is with interest earnings as I bonds offer a fixed rate of return and a variable semiannual inflation rate that is based on the Consumer Price Index (U) for March and September are combined to determine your interest rate. Interest is compounded twice annually for 30 years.

With EE bonds, how interest is calculated depends on when the bond was issued. For EE savings bonds issued after May 2005, a fixed rate of return can be expected. For those issued from May 1997 to April 2005, the rate is based on 90 percent of the 6-month averages of 5-year Treasury Securities yields. Interest also compounds semi-annually.

Worthwhile Investment?

Rates will change again on November 1, 2011, but for EE savings bonds purchased between May 1, 2011, and October 31, 2011, the rate of return is 1.10 percent. Series I bonds are currently paying 4.6 percent. Thus, EE rates correspond to what most banks are paying for savings accounts, while I rates are higher than what most banks are paying for long-term certificates of deposit. Go with I savings bonds if you’re wanting to maximize your rate of return.