Series EE Bonds

What are Series EE Bonds?

Series EE savings bonds are issued and backed by the U.S. government and are designed to double the purchaser's investment in 20 years.  They came to market in April 1997 and replaced the series E bond.  Series EE bonds issued between April 1997 and May 2005 will pay interest, compounded semi-annually, at a rate equal to 90% of the average 5 year treasury bond yield for the previous 6 months.  

Bonds issued after May 2005 will accrue interest at a fixed rate for the life of the savings bond.  The rates are determined each May and November and your savings bond will carry a rate equal to the last officially announced interest rate.

Issuance of Series EE Bonds

A series EE savings bond can be issued in paper form or electronically.  Paper EE bonds are issued at a discount of 50% to par and set to mature 20 years from the date of issuance, redeemable at par.  Therefore, you are guaranteed to double your investment in a 20 year timeframe.  They provide the option to extend maturity to 30 years from the date of issuance, if you choose.

Alternatively, you may create an account with TreasuryDirect and acquire the bonds through their website.  There are different rules for Series EE bonds purchased through their website.  These bonds are sold at par and redeemed at par.  They pay a fixed interest as we discussed above.

For both types of series EE savings bonds, the annual contribution limit is $5,000 and these should not be viewed as short term vehicles and cannot be redeemed within the first year.  If you decide to redeem your bonds before the first 5 years are up, you will be charged a penalty equal to the amount of three months of interest.  Once the five years are up, there will be no penalty; you will just owe federal taxes on the interest proceeds.

Tax Benefits

Interest payments are federally taxable but exempt from state and local taxes.  The exception to this rule is estate and gift taxes which could be at the state or federal level.  

Secondly, Series EE bonds provide the option to defer taxes on interest payments up to the date of the bond's redemption.  

Lastly, there is a tax benefit for those who use plan to use the earned interest to pay for post-secondary tuition expenses and other fees.  If you plan on using this interest to pay for these expenses, the interest gains will be excluded from your taxable income.
Tim Ord
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