Series EE Savings Bond

Series EE savings bonds are small-denomination U.S. government bonds sold at a discount and designed for individual savers, not institutional investors. You can buy them through Treasury Direct for as little as $25, and they accrue interest (without coupon payments) for up to 30 years.

How Series EE bonds work

Unlike traditional Treasury bonds or notes, EE bonds pay no periodic coupons. Instead, interest accrues and compounds within the bond. You buy an EE bond for $25 (half the face value of $50), hold it for 20 years, and its value will reach $50 if it earns the guaranteed minimum return. The interest is paid all at once when you redeem the bond—no semi-annual payments.

The current interest rate for new EE bonds is set by the Treasury and adjusted every six months. The rate is composed of two parts: a fixed rate for the life of the bond, plus a variable rate that adjusts semi-annually based on the 6-month T-bill rate. Your rate and all rates for bonds issued in your month remain constant even as new rates for future months change.

Tax-deferred growth

One advantage of EE bonds is tax deferral. You pay no federal income tax on the interest until you redeem the bond—or until it reaches final maturity. This allows the interest to compound tax-deferred for decades. Unlike 401(k)s or IRAs, EE bonds have no annual contribution limits, though there is a per-person, per-calendar-year purchase limit of $10,000 in electronic form.

Education benefits and tax breaks

EE bonds offer a tax advantage for education: if you use the proceeds to pay qualified education expenses (tuition and fees at eligible schools), you can exclude the interest from federal income tax entirely. This is a substantial benefit and is one reason EE bonds are popular for saving for children’s education.

However, the education exclusion has income limits and other restrictions. You must be age 24 or older when the bond is purchased for the exclusion to apply; bonds bought for children don’t qualify.

Redemption and liquidity

You can redeem EE bonds after one year, though there is a 3-month interest penalty if you redeem before five years. After five years, there is no penalty. You can redeem them at banks or through Treasury Direct at any time.

This makes EE bonds more liquid than they initially appear. While you should ideally hold for 20-30 years to maximize the benefit, you have the option to exit early if needed.

Comparison to savings bonds and alternatives

Series EE is one of two main types of savings bonds; Series I bonds are the other. I bonds are inflation-protected and useful in high-inflation environments. EE bonds are better when you expect lower inflation or want a fixed return.

Compared to money-market funds or Treasury bills, EE bonds offer a small premium for locking up your cash. For education savings, they beat ordinary Treasury securities because of the tax-free interest option.

The drawback: low yields

In low-rate environments, EE bond yields are mediocre. A 1% fixed rate plus a small variable component is not competitive with traditional Treasury notes or corporate bonds. EE bonds are primarily a vehicle for forced savings discipline and the tax advantages, not for maximizing yield.