EE Bonds vs I Bonds - Why These Can Be Safer for Long Term Investment

By Chika


Last Updated: March 2, 2023


With the hike in Fed interest rates plummeting the value of financial assets, investors are searching for a portfolio mix that can hedge the effects of the volatility and bring reasonable returns on their investments. 

One such financial instrument that you can consider is Series EE bonds.

These Federal government-backed bonds are a low-risk way to save money and earn regular interest over the long term (for 30 years or until you cash them).

In this article, we look at what EE bonds are, how you can invest in them, and the benefits of doing so. 



What are EE bonds?

EE bonds are a type of bond issued by the Federal Government that are guaranteed to double in 20 years of owning them.

Series EE Bonds are sold at half their face value and are available in denominations ranging from $50 to $10,000.

Initially, Series EE bonds were sold in paper formats. However, since 2012, Series EE bonds are sold electronically. As such you must have a Treasury Direct account to buy and manage new EE bonds. 



Difference between paper EE bonds and electronic EE bonds

Paper bonds differ from electronic bonds in 2 ways:


The face value differs.

While paper EE bonds were sold for half their face value, electronic EE bonds are sold at full face value.

For example, while you paid $50 for a $100 paper bond, you would pay $100 for a $100 electronic bond.


Purchase amount.

While paper bonds were sold only in certain amounts, electronic EE bonds can be bought in any amount from $25 to $10,000 in penny increments.

For example, you may buy an electronic EE bond for $36.73.



Interest payment on EE bonds

The monthly interest is accrued on Series EE bonds, although the Treasury Department determines the rates on May 1 and November 1.

Interest is compounded semiannually, which means that the bond's interest rate is applied to a new principal every six months. The new principal is the total of the old principal and interest accrued during the preceding six months.

Hence, the value of your bond increases due to both the accrual of interest and the expansion of the principal.

Bonds issued between May 1997 and April 2005 pay a variable rate of interest.

From May 2005, however, new bonds earn a fixed rate of interest that is determined at the time of purchase.

That interest rate is maintained for the first 20 years. Afterward, the initial rate is adjusted for the remaining 10 years. Usually, investors know about the new rate before they are implemented, because they are set before the EE bonds are 20 years old. 



How to Buy EE Bonds

They can be purchased online via the TreasuryDirect website.

You can also value and manage them on the website. Bear in mind that there are limits on how many EE bonds you can purchase each year. The minimum purchase amount is $25, and the maximum annual purchase amount is $10,000. 



How to Cash out EE Savings Bonds

Once you have held your bonds for at least a year, you may cash them in whenever you choose or need to.

Remember that you will owe three months of interest as a penalty if you do this prior to holding the bond for at least five years.

To redeem your savings bonds, complete the steps stated on the Treasury Direct website. The funds will be deposited into your bank or savings account within two business days. The majority of local financial institutions, including banks and credit unions, will redeem paper EE bonds.



How are EE Bonds Taxed?

They are free from state and local income taxes unless they are bequeathed or inherited by another individual.

Interest income collected on these bonds will be subject to federal income tax. They may be paid yearly, at maturity, or at the time the bond is cashed.

If you choose to pay your taxes yearly, you must continue to do so each year; you cannot switch to paying them at maturity or when the bond is redeemed. EE bonds may be exempt from all taxes, including federal, if used to pay for eligible higher education costs.

Regardless of who acquired the bond, the owner is responsible for tax payments. This means that if you got one as a gift, you must pay taxes on it. Each co-owner of an EE bond is accountable for one-half of the tax burden.



EE bond vs I bond

Currently, the U.S. Treasury provides two types of savings bonds: series I and series EE.

Choosing one over the other depends on both the present interest rates and your expectations for future interest rates and inflation.

Let's have a look at the two and compare them side by side:


Current interest rates (for bonds purchased between Nov 1, 2022 to Apr 30, 2023 )

EE bonds - 2.10%

I bonds - 6.89%


How do the bonds earn interest?

EE Bonds

  • The bonds you buy now have a fixed interest rate that you know when you buy it.
  • That rate remains the same for at least the first 20 years. It may change after that for the last 10 of its 30 years.
  • They guarantee that the value of your new EE bond at 20 years will be double what you paid for it.
  • (If you have a bond from before May 2005, it may be earning interest at a variable rate)

I Bonds

I bonds earn a rate that can change every 6 months. The rate is a combination of:

  • a fixed interest rate and
  • an inflation rate that we calculate twice a year (November, May)

Interest rate on an I bond will never fall below zero.


How often do the bonds for sale today earn interest?

Interest is earned monthly, but compounded semi-annually. Your bond's value grows both because it earns interest and because the principal value gets bigger. 


How soon can you cash it?

You cash in the bond after holding for a year or when the bond matures – reaches the end of its 30-year term. (If you cash in the bond before 5 years, you lose 3 months interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.)



The tax situation is the same for both EE and I bonds.

  • Federal income tax: Yes
  • State and local income tax: No
  • Federal estate, gift, and excise taxes; state estate or inheritance taxes: Yes

For federal income tax, you choose whether to report earnings each year or wait to report all the earnings when the bond finishes earning interest (or when you cash it if it's the end of its 30 year life).

If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.


Paper or electronic?

EE Bonds

New bonds are electronic only.

You may own paper bonds issued before 2012.

I Bonds

New I bonds can be electronic or on paper.

The only way to buy paper I bonds now is by using your IRS tax refund.

You may own paper I bonds issued before 2012 that you bought at a bank or through payroll savings.



EE Bonds

You can buy an electronic bond for any amount from $25 to $10,000. You can specify the amount to the penny. For example, you could buy an electronic bond for $50.23.

I Bonds

You can buy an I bond for any amount from $25 to $10,000. This can also be specified to the penny.

The smallest paper I bond costs $50. Other options for paper I bonds: $100, $200, $500, $1,000.



Final Thoughts

EE bonds are very safe investments that balance out the risk in a stock portfolio with more risky stocks.

But they can also be a part of more risk-averse portfolios that are just meant to protect capital and offer small growth. No matter your reason for buying these bonds, you can be sure that they're very unlikely to go into default because they're issued by the U.S. government.

Photo by Thirdman


Leave a Reply

Your email address will not be published. Required fields are marked *

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.


Subscribe for daily financial content

Daily articles, financial messages and affirmations to best help you navigate your financial future.