US savings bonds have long been considered very reliable investments, even though their returns are not especially impressive to most investors Series EE savings bonds, started in July of 1980, are some of the most popular government bonds.
The distinguishing feature of Serious EE savings bonds is that they are an accrual-type security. This means that they normally pay interest upon maturity. This is in contrast to most other types of bonds, including US government bonds, which pay every six months or annually. In investor terminology, bonds that do not have regular interest payments are called zero coupon bonds.
Advantages of Serious EE savings bonds
Since it is unlikely that the US government will default on its debt, US government bonds have always been considered a safe investment. The fact that EE savings bonds are zero coupon makes it easier for people to save all of their investment. They are not taxable until they are redeemed and can reduce some people’s tax burden since the total interest is exempt from state and local taxes. In addition, for those who qualify, the entire interest can be exempted from Federal taxes when used to pay for post secondary tuition and fees.
Disadvantages of Serious EE savings bonds
Any investment that is considered safe is likely to pay less. For the added security, those investing in US government bonds will see lower average returns than stocks and other investing that involves more risk. Serious EE savings bonds must be held for a year, and the buyer will lose three-months interest if the bond is sold within five years.
While EE savings bonds once had variable rates, all those sold after April 30, 2005 have fixed rates. The rates are announced by the government in May and November and will be sold at that fixed rate for six months after the announcement. However, the government guarantees the bonds will double in value at maturity (20 years) and will make up any difference below that doubling of price in a one-time payment. This gives them an implied interest rate of 3.5%. The bonds can continue to earn interest after maturity (the rate is subject to change) for another 10 years for a maximum total lifespan of 30 years.
Types of Series EE savings bonds
EE bonds are either electronic or paper series.
Electronic EE savings bonds are sold at face value. This means that a $50 bond will cost $50. They can be purchased in values of $25 or more. Note, since they can be purchased to the penny, the purchaser can set the exact value of the bond.
Paper EE bonds are purchased at half face value. This means that a $100 bond can be purchased for $50. However, upon maturity with the accumulated interested added to the value, it can be redeemed for $100. They can be purchased in values of $50, $75, $100, $200, $500, $1,000, and $5,000 and $10,000.
Since there is an annual limit of $5000 for each taxpayer, the limit of electronic bonds is $5000 and paper bonds is $10,000 (being that they are sold for half of face value).
Purchasing Series EE Savings Bonds
For individuals to purchase these bonds, they need to have a Social Security Number and either be a US resident or with a US address of record if living abroad (this address is not required for Americans working for the US government abroad).
Unlike some other types of government bonds, minors are also eligible to purchase them.
A number of different entities to include estates, corporations, partnerships and trusts are also able to purchase them in most situations.
To purchase electronic savings bonds, it is first necessary to create a TreasuryDirect account. They can then be purchased online.
It is possible to purchase paper bonds at a local bank or other financial institution, and they are often available on their websites. For some workers, they also can be purchased through payroll savings plans.