Savings bonds also have tax advantages. Interest accrued on a Series EE savings bond is not subject to state or local tax. Federal tax on the interest can be delayed until the bonds are cashed in, or potentially avoided altogether if the savings bonds are used for eligible education expenses. Because of their low risk, the interest rates on Series EE bonds are generally low. The interest rate is 0.10% per year as of 2022, but the Treasury Department guarantees that these bonds will double in value in 20 years. It will make a one-time adjustment to fulfill that guarantee if you hold the bonds that long. Let’s say you buy $5,000 of Series EE bonds and hold them for 15 years. At the end of 15 years, your $5,000 would be worth $5,075.53, and the $75.53 of interest would be subject to federal income taxes. Waiting five more years would increase the value to $10,000 with the Treasury’s one-time upward adjustment.
How Series EE Savings Bonds Work
The Treasury no longer issues paper savings bonds. Savings bonds can only be purchased through the Treasury’s TreasuryDirect website. You can create an account and use it to purchase Series EE and other savings bonds, cash in bonds you currently hold, find the value of bonds you hold, or purchase a gift bond. Interest is not paid out to investors like it would be with a traditional bond. It is accrued on the investors account and paid to them when the bond is cashed on the TreasuryDirect website. Bonds must be held at least one year and can be held up to 30 years. If bonds are redeemed within five years of purchase, the investor forfeits the previous three months’ worth of interest. After five years, the investor does not forfeit any interest.
Alternatives to Series EE Savings Bonds
Series EE savings bonds are not the only choices for fixed-income investments that are issued by governments. Here are some alternatives that can provide similar benefits of lower risk and reliable returns.
Series I Savings Bonds
Series I savings bonds are similar to Series EE and both are sold on the TreasuryDirect website. Series I savings bonds provide interest based on the current inflation rate, so they are designed to minimize the risks of inflation. They have the same tax advantages as Series EE bonds. You can purchase paper versions of Series I bonds with your tax refund.
Treasury Notes and Bills
In addition to savings bonds, which have long-term maturity lengths of between 10 and 30 years, the Treasury also issues shorter-term notes and bills. Treasury notes are medium-term bonds with maturities between two and 10 years. Treasury bills are short-term bonds with a maturity of less than a year. Interest rates for Treasuries are set at issuance, then float on the active market. Unlike savings bonds, investors can purchase and sell Treasuries on the secondary market. Like savings bonds, Treasuries backed by the “full faith and credit” of the U.S. government are considered to have no credit or default risk.
Municipal Bonds
Municipal bonds, or munis, are similar to Treasuries, but are issued by government entities such as states, counties, cities, or villages to build public projects like roads or schools. Many munis pay tax-free interest to investors. Munis generally are considered riskier than Treasuries because municipalities have less tax power than the federal government. Still, many munis are considered to be less risky than corporate bonds or other fixed-income investments. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
