Series EE Savings Bond

A Series EE savings bond is a savings bond issued by the U.S. Treasury that earns a fixed rate of interest set when it is bought and comes with a 20-year doubling guarantee. Unlike a Treasury note or bond, an EE bond is non-marketable: it cannot be bought or sold on the open market, only purchased from and redeemed with the Treasury. It is registered to a specific owner, earns interest monthly and compounds twice a year, and can be held for up to 30 years, after which it stops earning. The Treasury sets the fixed rate twice a year, in May and November, and the rate in effect when a bond is issued is guaranteed for that bond's first 20 years; the Treasury may adjust the rate or the way the bond earns interest for the final 10 years.

The defining feature of the EE bond is the doubling guarantee. TreasuryDirect states that the Treasury guarantees a bond will double in value in 20 years, "even if we have to add money at 20 years to make that happen." If the fixed rate compounded over 20 years leaves the bond short of twice its issue price, the Treasury makes a one-time adjustment at the 20-year mark to bring it to exactly double. That guarantee is what gives the EE bond a meaningful floor under its return for a patient holder, and it is also why redeeming an EE bond well before year 20 forfeits the best part of the deal. Two rules constrain early access. A savings bond cannot be redeemed at all in its first 12 months. Cashing one before five years forfeits the most recent three months of interest. After five years it can be redeemed any time with no penalty, but the doubling guarantee only rewards holding the full 20 years. The EE bond is often confused with the Series I savings bond, and the difference is the rate structure. An EE bond earns a single fixed rate and has the 20-year doubling guarantee. A Series I savings bond earns a composite rate that combines a fixed rate with an inflation component that resets every six months, and it carries no doubling guarantee; it is built to keep pace with inflation rather than to hit a fixed multiple. An investor deciding between the two is choosing between a known long-run floor and inflation protection.

An EE bond earns its fixed rate month by month, and the Treasury backstops the result with the doubling guarantee at 20 years.

A hypothetical example. An investor buys a $1,000 EE bond and holds it for 20 years.

• The bond earns its fixed rate, compounded semiannually, for 20 years.
• If that fixed rate alone would leave the bond worth, say, $1,600 at year 20, the Treasury adds the difference so the bond is worth exactly $2,000.
• Doubling over 20 years is equivalent to an effective return of about 3.5 percent a year, because 1.035 compounded over 20 years is roughly 2. That is the floor a full-term holder is guaranteed.

The dollar figures here are illustrative; the fixed rate a real bond earns depends on the rate in effect when it was issued, published at TreasuryDirect.gov. The point is that the guarantee sets a minimum outcome for the 20-year holder and does nothing for someone who cashes out early.

Pros

• The 20-year doubling guarantee sets a firm floor under the return for a long-term holder, backed by the U.S. government.
• Interest is exempt from state and local income tax and deferred from federal tax until redemption.
• Interest can be entirely federal-tax-free when used for qualified higher education expenses and income falls under the annual limit.
• No market price risk: the redemption value never falls.

Cons

• The doubling guarantee rewards only a full 20-year hold; redeeming earlier forfeits its benefit and, before five years, three months of interest.
• Cannot be redeemed at all in the first 12 months.
• The $10,000 annual limit per Social Security number caps how much can be bought.
• The fixed rate can lag inflation, unlike the Series I bond's inflation-linked rate.