The U.S. Treasury's savings bond program was introduced in 1935 to encourage Americans to save money and invest in the American government. The Treasury has adapted to the times, however, and with rare exceptions, savings bonds are no longer printed on paper. The government sells savings bonds and other securities through the TreasuryDirect.gov website.
Savings bonds now come in two versions, the Series EE and the Series I.
Series EE bonds carry a fixed-rate and are investments that are guaranteed to double in value over 20 years. The newer Series I bonds have both a fixed rate and a variable rate to keep up with inflation.
Series EE U.S. Savings Bonds
The better-known Series EE bond is a direct descendant of the Series E bond. The original Series E was known as the War Bond and helped finance the American participation in World War II.
Series EE bonds can be purchased with a face value of as little as $25. They come with a guarantee from the U.S. government to at least double in value over the term of the bond, which is commonly 20 years. At maturity, the owner of the bond can redeem the principal or can opt to let it collect interest for another 10 years beyond the maturity date.
The interest rate is fixed for 20 years at the time it is issued. The government may adjust the rate after the 20th year.
The rates are set twice a year, in May and November, and remain the same for all bonds issued during the following six-month period.
For the six months ending April 30, 2019, the interest rate on Series EE bonds was 0.10%.
The buyer of an electronic Series EE bond pays the full-face value up front. If compound interest does not double its worth in 20 years, the U.S. Treasury commits to making up the difference.
[Important: Series EE bonds issued before June 2003 were purchased at half the face value, with the promise that they would double to face value over 20 years. The interest for those older bonds is calculated on the payment amount, not on face value. The same commitment holds: It's worth face value in 20 years, or the U.S. Treasury makes up the difference.]
Series EE bonds are issued to a single owner and cannot be sold in the secondary market. They can be cashed in early, with a three-month interest penalty within five years of purchase.
Interest income from EE bonds is exempt from state and local taxes but not from federal taxes.
Series I U.S. Savings Bonds
Series I savings bonds are a relative newcomer, having been introduced in 1998.
Unlike EE bonds, Series I bonds don't come with a guarantee to double in value over 20 years. Instead, Series I bonds are issued for a period of 30 years and have a rate of return that is fixed for the life of the bond plus an inflation-adjusted interest rate. The adjustable part is revised semi-annually, in May and November, and is based on the Consumer Price Index for urban areas(CPI-U).
Series I bonds purchased during the six months ending April 30, 2019, are paying 2.83% interest. That was up from 2.52% for the previous six-month period.
The Series I bonds can be purchased directly from the U.S. Treasury at its website, "www.treasurydirect.gov." They also can be purchased via a tax return, using tax refund dollars. When using a tax return to by Series I bonds, it is the rare case when the purchaser will receive a paper certificate.
There are similarities to Series EE bonds. Series I bonds can't be sold but can be redeemed early with a penalty of three months interest if it's less than five years from the issue date.
One potential bonus is that Series I bonds if used to pay the costs of higher education, may be exempt from federal taxes as well as state and local taxes.—the the bond must be redeemed and the proceeds used in the same calendar year to qualify.
The key difference between the two types of savings bonds is that adjustable rate. Series I bonds do not carry the same guarantee of doubling in value over 20 years, but they do have a built-in inflation adjustment.
What's the worst that could happen? The owner of a Series I bond could be hit with years of low inflation or even deflation, and fail to get that doubling in value over time.
- The Series EE savings bond has a fixed rate, with a commitment that the holder will receive double its face value when it matures in 20 years.
- The Series I savings bond has no guarantee but carries a fixed rate plus an adjustable interest rate based on inflation.