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Buying EE Savings Bonds When Your I Bond Limit is Reached?

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As I mentioned in my I Bond post on Monday, I Bonds purchased this April can return close to 2.33% annualized for an 11-month period. Unfortunately, the Treasury only allows a total purchase of $10K in I Bonds per calendar year per SSN ($5K paper & $5K electronic). For those who remember the good old days when I Bonds had a fixed rate of over 3%, these current rates are hard to find appealing. However, compared to other risk-free investments for small savings, it's not a bad deal.

For the last several years, I Bonds have been considered a better investment than EE Bonds. Like I Bonds, the Treasury limits EE Bond purchases to $10K per calendar year per SSN ($5K paper & $5K electronic). An interesting question was asked in this Boglehead thread. If you have hit the limit on I Bond purchases, does it make sense to buy EE Bonds?

Like I Bonds, EE Bonds share the same attractive tax benefits: 1) interest is exempt from state and local income tax and 2) for federal tax you can defer taxes until you redeem the savings bond.

The main issue with EE Bonds is that those purchased after May 2005 earn a fixed rate of return, and the rates have been low. Currently, the rate is only 1.20%. However, there is one caveat that helps to improve the value. EE Bonds are guaranteed to double in value in 20 years. As stated by the Treasury, "They are guaranteed to reach face value in 20 years." Note, they're purchased for 50% of their face value. This comes out to be an annual rate of return of 3.50%. That's still a long time for a mediocre return.

For more details about savings bonds, refer to this TreasuryDirect.gov page which compares I Bonds with EE Bonds.

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