EE Bonds and I Bonds – Worth a Look

EE Bonds and I Bonds – Worth a Look

The United States Treasury offers two lesser known types of bonds which are sold directly to consumers. They offer distinct advantages over CDs, bond funds, and premium savings accounts which we will discuss below.

These two types of Savings Bonds are not commonly known to investors since you have to get them on your own from Treasury Direct.  Brokerages can't sell them and can't make any money off them, so they are never mentioned.

  • EE-Bonds - like a CD with a fixed rate of return set at the time of purchase. A key feature is the minimum rate of return is 3.5% if held for 20 years.
  • I-Bonds - essentially an inflation protected CD. The rate of return fluctuates based on a combination of the fixed rate set at the time of purchase plus the rate of inflation which is adjusted semi-annually. The combined rate cannot go below zero. 

So, why choose these bonds? EE Bonds and I Bonds are alternatives to holding bond ETFs, bond mutual funds, and individual bonds. Buying them frees up room in your other tax deferred retirement accounts for assets that may offer high long term appreciation. Moreover these bonds have special attributes that can help improve your portfolio. This is especially true in a low interest rate environment or for people in states with high income tax rates.

Read on to learn all about EE Bonds and I Bonds.

EE Bonds After 20 Years - minimum 3.5% Return

If you purchase EE Bonds, you can keep them for a maximum of 30 years and a minimum of 1 year. Moreover, if you redeem them within 5 years, you may have to pay a small penalty – forfeited interest from the last 3 months.

The sweet spot for holding EE Bonds is 20 years. The US government promises to double the face value of your EE Bonds after 20 years. That means the maturity period of these bonds is maximized at twenty years (assuming the fixed rate is below 3.5%). 

For example, if you buy EE Bonds worth $50 today, you can cash them for $100 after 20 years. That works out to an interest rate of 3.5% regardless of whatever the face value of the EE Bond says. Currently 3.5% is an excellent rate for an essentially “risk free” investment. The 20 year holding period is a long time, which some might consider a big negative.

You will get this amount irrespective of the interest rates and fluctuations that may have occurred during this period. That is because the US government will make the necessary adjustments and guarantee to double your bonds' value in 20 years.

I Bonds - Like Inflation Linked Certificate of Deposits

The interest rate of I Bonds is linked to a nationally recognized measure of inflation—the Consumer Price index (CPI). Therefore, as inflation increases, the composite rate of these bonds will increase too.

Inflation-linked CDs, too, have their interest rates linked to the inflation rates. However, the caveat here is that their interest rates offered are often too low. Therefore, though they protect buyers from the risk of inflation, the real interest rate obtained is most likely negative. I Bonds have some significant similarities with inflation link certificate deposits.

As prices rise, you can buy fewer things with the same $1 bill. Thus, inflation adversely affects the purchasing power of investors. I Bonds are designed to maintain purchasing power, but not grow in value like a stock fund. I Bonds are useful for people looking to add inflation protection to their portfolio with as little risk as possible.

Comparison Table 

Here’s an overview of EE Bonds vs. I Bonds:


EE Bonds

I Bonds

Tax treatment

Exempt from state and local taxes.

At the federal level interest income can be taxed each year, or when redeemed. 

Exempt from state and local taxes.

At the federal level interest income can be taxed each year, or when redeemed. 

The earliest time you can break it

After one year.

After one year.

Penalty for breaking

In the first five years, the penalty is the latest three month's interest. After five years no penalty.

In the first five years, the penalty is the latest three month's interest. After five years no penalty.

Rate of Return

Fixed interest rate set at the time of purchase.

Fixed interest rate set at the time of purchase, plus additional rate based on CPI.

Useful in an emergency fund

No - because holding for 20 years is optimal.

Yes - break at any time after one year and you can always buy back in later.


Special Tax Treatment

EE and I Bonds are a kind of hybrid tax-deferred bond. They are purchased with after tax money (just like your taxable brokerage account). Your basis in the bond is never taxed, but the interest is. You can decide whether you wish to pay the interest annually or when you redeem or sell them back. 

There are additional tax perks with these bonds as well. 

Tax exemptions for series I Bonds and EE Bonds:

  • Both series I Bonds and EE Bonds are exempt from state and local taxes.
  • Neither of the bonds is exempt from federal taxes.
    • Except… I Bonds and EE Bonds can be exempt from federal taxes if used for higher education.

Timing of taxes for series I Bonds and EE Bonds:

  • You can opt for one of the two tax payment methods – cash method and accrual method
    • The cash method requires you to pay the taxes on the interest accrued at the time of redemption. This way you can control when to take the tax hit from the interest. Best case scenario is to do it in a year when your income is lowest, such as when you are in retirement but before you begin to draw social security.
    • Accrual method means you pay the taxes every year on that year’s gain at whatever marginal tax rate you are at.

The hybrid tax treatment causes them to work similar to a bond fund held in a IRA or 401(k). Purchasing these bonds will let you free up space in your tax-deferred retirement accounts to add more stocks elsewhere in your portfolio.

The exemption from state and local taxes can be a huge benefit for people living in states with a high income tax.

Less Interest Rate Risk

When interest rates rise (which is likely to occur at some point in the future) bond funds tend to decline sharply in the short term and then gradually recover.

This is because when newer bonds come out offering a higher return, the attractiveness of the older bonds with the lower rates automatically declines. As a result the older bonds need to be sold at a lower price to seem attractive enough.

The same does not hold true for EE and I saving bonds. They work more like owning a certificate of deposit (CD). The face value of the bond never changes. When you redeem it you get the full amount back, irrespective of market fluctuations.

Even if interest rates rise, one strategy is to simply break the EE or I Bond and purchase a new one at the higher rate.

How and When to Purchase

EE Bonds and I Bonds are non-tradeable electronic bonds (paper form not available anymore) sold by the US government on the official website - Treasury Direct.  So you don't buy them from Vanguard, Ameritrade, Fidelity, etc...

The Treasury Direct website can be hard to navigate. It looks like something from the early 2000’s (and probably hasn’t changed since then), but it gets the job done.

There is a limit on how much you can purchase per year, per person. Each person can purchase $10k in EE Bonds and $10k in I Bonds each year. So a couple would max out their purchases at a total of $20k for each type of bond.

You must open an account at Treasury Direct for each individual. So for a married couple, each partner would need their own account.

EE Bonds are guaranteed to double in 20 years. If you start loading up on these around age 35-40, you can pre-purchase spending in your early retirement years. Compared to a traditional IRA or 401K, they offer the added benefit that you can cash out EE Bonds and I Bonds with a small penalty after 1 year and without penalties after five years. 

Since EE Bonds and I Bonds are low earning assets and contributions are after tax it makes sense to max out other tax deferred accounts (401k, IRA, Roth IRA) etc before contributing.

How Would EE Bond and I Bonds Do Based on Changes in Interest Rates

Interest rates are the defining factor that determine if EE Bonds or I Bonds “won” compared to other bond alternatives. With interest rates low, and likely to go up at least a bit in the next ten years, EE Bonds and I Bonds have some attractive features. 

Let’s explore three different scenarios on interest rates going forward and how they affect EE Bonds and I Bonds. 

Interest rates stay low (below 2%):

If interest rates remain low, borrowing money becomes cheap, which means there is a lot of cash in the economy. However, this rapid inflow of money can push up prices and contribute to inflation. 

EE Bonds

The guarantee of EE Bond doubling in value after 20 years with a 3.5% factor is a definite win vs 2% elsewhere.

I Bonds

I Bonds do okay when interest rates are low. Since they pay fixed rate of interest along with an inflation-adjusted rate, they might incur real losses if inflation is flat.

Interest rates rise a bit (2% - 3.5%):

When interest rates are on the rise, the bonds issued before with lower interest rates decline in value. It is because no one would want to purchase a bond with a 3% coupon rate if there’s a 7% coupon rate bond available for the same price.

EE Bonds

With EE bonds it depends on the timing of the rise in interest rates. If rise happens relatively soon after purchasing the bond it is best to consider breaking the EE Bond. The reason is that EE Bonds are not affected by interest rates when nearing maturity. If the rate increase happens 10 years into the 20 year holding period, it may be worth it to hold on which would result in a break even scenario.

I Bonds

I Bonds do okay when interest rates are rising. They tend to perform well when the interest rate rises as the variable inflation rate fluctuates too. They can always be broken and re-purchased at the prevailing fixed rate.

Interest rates rise a lot (above 3.5%):

There is an inverse relationship between interest rates and inflation. So, if the interest rates rise, then EE Bonds will succumb to the interest-rate risk because new bonds will be issued with a higher rate of interest that will be lucrative for investors. 

EE Bonds

In a scenario when old EE Bonds can no longer catch up to the attractive interest rates of newer bond prices, it time to break them and reinvest. EE Bonds with a low rate are not at a wise thing to hold when interest rates increase above 3.5%. If this happens sooner than later in the 20 year holding period, breaking early isn’t so bad. If it happens 15 years into the 20 year holding period that can result in a small loss relative to what you would have made elsewhere.

I Bonds

Since the interest rate on I Bonds is a combination of fixed-rate and a variable inflation rate, I Bonds tend to do great when interest rate increases, assuming inflation is part of the reason rates are going up. Again they can always be broken and re-purchased at the prevailing fixed rate.



Both EE Bonds and I Bonds provide additional investment options for the bond portion of your asset allocation. The fundamental difference between them is the variable inflation interest rate offered by I Bonds and the guaranteed 20 year doubling for EE bonds.

Backed by the US government, both EE Bonds and I Bonds are reliable and give several tax benefits to investors. Before picking which one is right for you, you should carefully weigh the options and see the benefits that both bonds offer.

For more reading:

Image Treasury Department by Paul Savala is licensed under CC BY 2.0.

The post EE Bonds and I Bonds – Worth a Look is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Personal Finance, Net Worth
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