Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
Maybe you’re interested in government bonds as a way to add low-risk growth potential to your investment portfolio. Or maybe, like this author, you’ve just found some long-forgotten bonds in your closet, gifted to you at birth (thanks, Uncle Jack!).
Either way, Series E savings bonds and their modern sibling, Series EE savings bonds, can be a little confusing — especially if you’re dealing with the old-school, paper kind. How do they work? Should you cash them in? Are they even still valid? Here’s what you need to know.
What is a Series E savings bond?
Government bonds, including the Series E savings bonds, are safe, low-risk investments that allow investors to build interest over time without exposing their assets to the fluctuations of the stock market.
U.S. savings bonds were first issued back in the 1930s. The Series E hit the market in 1941, just ahead of the entry of the United States into World War II. As the name implies, Series E bonds were preceded by Series A through Series D, but due in part to its marketing as the “Defense Bond” in the World War II era, it became the most widely held investment security in the world at that time.
In 1980, the Treasury discontinued the Series E bond, replacing it with the Series EE savings bond, which is still available today. The Series EE savings bond pays interest for up to 30 years, and those purchased today earn a fixed interest rate of 0.10% — although this does vary. You can find the most up-to-date rates at the U.S. Treasury website.
How to redeem a Series E and Series EE savings bond
All outstanding Series E savings bonds have reached their final maturities and stopped earning interest. However, you can still redeem them for cash at certain financial institutions and the Treasury. Call your bank and ask whether they will redeem Series E bonds before you take them to a branch. Alternatively, you can mail the bonds to the Treasury, which will credit your bank account with the proceeds.
Series EE savings bonds can be redeemed anytime after one year of ownership, but certain early redemption penalties do apply — more on that below. However, if you’ve got some Series E or EE bonds in your possession, you can redeem them penalty-free so long as they’re at least five years old.
Cashing them early does mean losing out on potential interest earnings. And since the bond’s interest is compounded semi-annually, the specific month you redeem them does matter. See this table to determine when best to redeem your own bonds.
Pros and cons of Series EE savings bonds
If you’re deciding whether or not to purchase a Series EE bond today, there are a few factors you’ll want to weigh carefully before making a decision.
Benefits of a Series EE savings bond
- Proceeds from the sale of Series EE savings bonds are exempt from state and local income taxes — though you still owe federal income tax. There are also some additional taxes that may apply, such as estate, gift, excise, or inheritance tax.
- You can defer reporting the bond’s interest on federal income taxes for up to 30 years (or until the bond is reissued or redeemed).
- Newly-issued Series EE savings bonds are available exclusively in electronic form, allowing you to easily manage and redeem them directly from your web browser.
- You may be eligible to exclude bond earnings from your federal tax reporting if you’re using the proceeds to pay for qualified expenses associated with higher education, including tuition and fees.
- Series EE savings bonds offer investors a safe way to earn interest, as the money isn’t exposed to the whims of the market.
Drawbacks of a Series EE savings bond
- If you redeem your Series EE savings bond before five years have elapsed, you’ll forfeit the preceding three months’ interest. You also can’t redeem a bond before it’s 12 months old.
- The education tax exclusion doesn’t include room and board as part of its list of qualified higher education expenses, and the total amount is reduced by any grants, scholarships, or other financial aid the student might be awarded.
- You must meet eligibility requirements to buy Series EE savings bonds, such as having a social security or employer identification number.
- Series EE savings bonds — and any bond, in fact — don’t carry the same exponential growth potential as an equity asset, like a stock.
How to buy a Series EE savings bond
These days, Series EE savings bonds can be purchased through TreasuryDirect. They are no longer issued in paper form or sold by third-party financial institutions.
The rate of return you’ll see on your Series EE savings bonds depends on when they’re purchased. Bonds purchased at anytime after May 1, 2005 are subject to fixed interest rates. The individual rates vary over time, but for bonds issued between November 1, 2018 and April 30, 2019, the annual interest rate is 0.10%. For the most up-to-date information on current interest rates, visit the Treasury’s website.
Series EE bonds purchased between May 1995 and April 2005 are subject to variable interest rates, which is determined each May and November 1st and applies over the following six-month periods.
The bonds’ maturity dates vary, but never extend more than 30 years. You can determine the value of your bonds by entering their serial numbers into TreasuryDirect’s online calculator.
Again, pay attention to not only the year of maturity, but the month — if you cash them out too hastily, you may lose out on additional interest!
Are Series EE savings bonds right for you?
Investing wisely is the best way to reach long-term financial goals, and thankfully it takes relatively little effort. If market fluctuations make you leery about buying stocks, options like the EE Series savings bond are an excellent way to earn low-risk interest. They also make great gifts for loved ones, and since they’re issued exclusively in electronic form, you won’t have to worry about them getting lost in dusty cardboard box in a forgotten corner.