Are EE Bonds Worth Investing In?
- An EE Savings Bond earns interest for 30 years before it fully reaches maturity. Paper bonds are issued at half of face value, so a $50 bond would cost $25 to purchase. Electronic bonds, on the other hand, are sold at face value. The longer a bond is held, the more valuable it becomes. Bonds must be held for at least one year before they can be redeemed; bonds redeemed less than five years after the issue date are subject to a penalty.
- Because EE Savings Bonds are issued by the federal government, they are a low-risk investment and are guaranteed to reach a certain value after 20 years and can earn interest for up to 30 years. According to the U.S. Treasury, bonds accrue interest monthly and all earned interest is paid when the bond is redeemed, less any early redemption penalties. An EE Savings Bond will double in value by the maturity date (20 years from issue) and if the bond does not reach that value as a result of interest payments, the U.S. Treasury will make an additional one-time deposit to offset the difference.
- Although a certain rate of return is guaranteed, it may not be as good a return as other types of investments may provide. Other savings options -- such as bank certificates of deposit, mutual funds or stocks -- may offer higher interest rates that can change over time. Locking in a low long-term rate, such as with a savings bond, where the rate is locked in for the life of the bond, may cost the account holder potential earned interest if rates go up, according to the Daily Mail. There are also purchase limits associated with EE Savings Bonds, limiting the total investment. In 2010, an individual could buy no more than $5,000 in electronic or paper bonds, according to the U.S. Treasury.
- EE Savings Bonds purchased on or after May 1, 2005, earn interest at a fixed rate. In 2010, bonds earned at a rate of 1.4 percent. Interest earned on an EE Savings Bond is considered income and is subject to federal income taxes, but is exempt from state and local taxes. EE Savings Bonds are tax deferred, meaning taxes are not paid on interest earnings until a bond is cashed but bond-holders have the option to declare interest as income annually. EE Savings Bonds purchased after 1989 that are used for qualifying education expenses may also be tax-exempt. According to the U.S. Treasury, qualifying education expenses include tuition and fees and expenses for classes or activities related to a degree or certificate program in the year the bond is redeemed.
- The most common EE Savings Bond issues are to save for a child's higher education expenses, to supplement other retirement savings and as gifts, according to the U.S. Treasury. Each of these long-term applications allows a better chance that a bond will reach maturity before it is redeemed.
