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What Are EE Bonds? How Do They Work?

Series EE bonds are an especially attractive fixed-income savings option because their face value doubles if held for 20 years.
Image of U.S. savings bonds with text overlay: "What Are EE Bonds?"

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

What Are EE Bonds?

The United States Treasury offers investors several low-risk bonds that are backed by the “full faith and security” of the U.S. government. These bonds make twice-yearly interest payments and have the highest credit rating available, AAA. They are also considered to be liquid and thus easily convertible to cash. As such, they are considered some of the safest investments available, since the U.S. government is virtually guaranteed never to default.

Formerly known as Patriot Bonds, the original Series E bonds are the ancestors of the Series EE bonds we know today. They were paper in format and sold as war bonds through World War II, accruing interest as late as 2010. Most of these bonds were sold at a discount and are now worth their face value plus interest accrued, which can be calculated by using the bond’s issue date and serial number on the U.S. Treasury’s 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 par value, EE bonds offer an interest payment, or yield. These bonds are considered especially attractive because they are guaranteed by the U.S. government to pay out double their face value after 20 years. This makes them great investment for those planning on holding them for the long term. They are also make popular gifts—especially when used to fund higher education. We’ll get more into tax considerations below.

How Do Series EE Bonds Earn Interest?

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

  • EE bonds issued after May 2005 pay a set, or fixed rate of interest, which is announced by the Treasury department twice a year: on May 1st and November 1st.
  • EE bonds issued from May 1997 through April 2005 earn interest on a variable basis. This rate changes every six months.
  • EE bonds issued prior to May 1997 earn interest at differing rates—check the TreasuryDirect website for more information.

What Is the Current Rate of Interest for 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 begin earning interest from the month you purchase them. This interest gets compounded on a semi-annual basis and added to the principal of the bond. EE bonds earn interest through maturity, at 20 years, or when you decide to redeem them.

The Treasury Department guarantees that, upon redemption, if the par 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 Respond to Inflation?

Bond prices have an inverse relationship to interest rates; when interest rates go up, price prices fall. Typically, the Federal Reserve responds to inflation by raising interest rates, so during inflationary periods, bonds don’t usually add much value.

he U.S. government acknowledges that these savings bonds won’t see high returns in rates of interest; however, they attempt to compensate investors for making a long-term commitment to Treasury bonds with the guarantee of doubling their par value investment. The only question remains, will doubling one’s dollar investment keep up with inflation?

Which Treasury Category Do EE Bonds Fit Into?

There are several categories of Treasury securities:

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  • Treasury bills, which mature in 1 year or less, and do not offer interest payments
  • Treasury notes, which mature in 2, 3, 5, 7, or 10 years and make semi-annual interest payments
  • Treasury bonds, 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)

Out 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 chart provides details:

I Bonds Vs. EE Bonds

Source: TreasuryDirect.gov

I BondsEE Bonds

Format

Paper and Electronic

Electronic only

Purchase Price

Face Value

Face Value

Interest

Composite Rate (Fixed + Variable)

Fixed for bonds after May 2005

Maximum

$15,000

$10,000

Interest Compounded

Semi-Annually

Semi-Annually

Redemption

After 12 months

After 12 months

Penalties

Less 3 months if redeemed before 5 years

Less 3 months if redeemed before 5 years

The main difference between I bonds and EE bonds has to do with how they earn interest.

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

Another difference between EE bonds and I bonds has to do with the maximum purchase amount per year. The allowable maximum for I bonds is $15,000, with $5,000 of that coming from one’s 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 TIPS is indexed to inflation as measured by the Consumer Price Index. This means that they tend to outperform other categories of bonds when inflation is high, but when there’s deflation, they lose more, too.

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

What Are EE Bonds Worth at Maturity?

The U.S. Treasury Department guarantees that EE bonds will be worth at least double their face value upon maturity 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 Redeem EE Bonds?

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

How Are EE Bonds Taxed?

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

Taxpayers can report interest annually or they may defer reporting interest until they cash the bond, it reaches maturity, or they sell it. Use tax form 1099-T.

Can EE Bonds Be Rolled Over Into an IRA? Used for Education? Gifted?

You can only add cash to an IRA. Therefore, savings bonds like EE bonds cannot be rolled over. However, you can cash the bonds after they reach maturity and add that cash to an IRA.