SAVINGS BONDS COME in two flavors: EE and I. Series EE bonds pay a fixed interest rate for up to 30 years. For bonds purchased in the six months starting May 1, 2022, that rate is a meager 0.1% a year. Meanwhile, I bonds increase in value along with inflation, plus holders can sometimes earn a small additional sum. For I bonds bought in the six months starting May 1, 2022, there’s no additional interest earned, but the annualized yield for the first six months will be 9.62%, thanks to high recent inflation.
Given that EE bonds pay just 0.1%, while I bonds pay 0% but offer inflation protection, I bonds would seem almost certain to be the better deal—unless you plan to hold for 20 years or more. The unusual wrinkle: The Treasury Department guarantees that the value of EE bonds will double in value over 20 years. That means that, while the interest rate is just 0.1% a year for those with shorter holding periods, you’re guaranteed 3.5% a year if you keep your EE bonds for 20 years. What if you sell any earlier? You’re stuck with the 0.1%.
With both EE and I bonds, you can defer paying taxes until you sell or the bond matures, at which point the accumulated interest is subject to federal income taxes, but not state and local taxes. You may, however, be able to avoid that tax bill if the proceeds are used for college costs, as we discuss in the college chapter.
Savings bonds can be purchased in amounts as small as $25. An individual could potentially buy $25,000 of savings bonds in a year, with the maximum set at $10,000 for EE bonds, $10,000 for I bonds and $5,000 for I bonds bought with a federal tax refund. You can sell a savings bond after holding it for one year. But if you sell within the first five years, you lose the last three months of interest. For more information, go to TreasuryDirect.gov.
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