The Benefits of I Bonds vs EE Bonds To Store Your Savings (2024)

Series I bonds and EE bonds are popular U.S. savings bonds that offer a safe way to save. Choosing between the two can be difficult. The best place to start is to gain an understanding of the terms of each bond and then compare the benefits and drawbacks of each.

Both bonds are solid investments that have minimal risk and virtually guarantee a return. You can’t go wrong in this situation. You can only do better.

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I Bonds vs EE Bonds
Header Cell - Column 0 I Bonds- ElectronicI Bonds- PaperEE-Bonds
How to buyFrom TreasuryDirect.gov onlyCan only be purchased using your income tax refund. Use Form 8888From TreasuryDirect.gov only
Interest rateTwo rates - a fixed rate and a variable rateSameRate when purchased is locked in for 20 years, It may be adjusted after 20 years
Row 2 - Cell 0 The fixed rate is set on the date you buy the bond and remains the same for the entire term. The variable rate is adjusted for inflation twice a yearSameN/A
Earns interestEarned semi-yearly and added to the principalSameSame
Minimum per transactionElectronic I-bonds: $25 minimum or any amount above that to the pennyPaper I-bonds: $50Same
Maximum purchase, per social security number$10,000 per year of electronic bonds$5,000 of paper bonds Paper bonds can only be purchased using a refund from your tax return$10,000 per year of electronic bonds. These are not sold as paper bonds
Liquidity/Marketability Can never be sold on the open market — only redeemed. Can’t be redeemed for the first year, and there’s a penalty (loss of last three months' worth of interest) for redeeming within the first five yearsSameSame
Tax treatmentSubject to federal income tax? Yes Subject to state and local income tax? NoSameSame
Exclusion from federal income taxYou may not have to pay tax on the earnings if you use the money for qualified higher education expenses and you don't exceed the income limitsSameSame
How to redeemAccess your TreasuryDirect account, go to ManageDirect and use the link for cashing in securitiesAt the bank where you have an account or by mail. Fill it out and remit FS Form 1522. If the value of the bond(s) you are cashing is more than $1,000, you must have your signature certified. Send the form and the bonds to the address printed on the FormAccess your TreasuryDirect account, go to ManageDirect and use the link for cashing in securities

I bonds

Benefits

  • Inflation protection. One of the standout benefits of I bonds is the built-in inflation protection. Because part of the interest rate is adjusted semi-annually for inflation, it can help preserve the purchasing power of your investment.
  • Can buy more I bonds than EE bonds. You can buy an additional $5,000 in paper bonds with your income tax refund.

Risks

  • Modest returns in low inflation. In periods of low inflation, the returns can be modest. Since the interest rate of I bonds is partly tied to inflation, low inflation can result in lower yields.
  • Variable interest rates are a risk you can't discount when you buy an I bond, and it's not like you can just sell the bond when the rate falls. You're locked in for the first year.

EE bonds

Benefits

  • Guaranteed returns. One of the most attractive benefits of EE bonds is the guaranteed return. The U.S. Treasury pledges that these bonds will double in value if held for 20 years, translating to an effective interest rate of about 3.5% per year over that period.
  • Stability: EE bonds offer a stable, predictable return, making them an excellent choice for conservative investors.

Risks

  • Lack of inflation protection: The primary risk associated with EE bonds is the lack of protection against inflation. The fixed interest rate does not adjust for inflation, meaning that if inflation rises significantly, it can erode the purchasing power of the bond's return.
  • Limited yield potential: EE bonds are a secure and low-risk investment, but they also come with lower returns than riskier investments such as stocks or mutual funds. Therefore, they may not be the best choice for those seeking higher returns and willing to accept higher risk.

I bonds offer an inflation-protected return, ensuring your savings keep pace with rising costs. EE bonds, on the other hand, provide a fixed-interest rate for the life of the bond, offering a predictable return.

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Benefits of both I bonds and EE bonds:

Tax advantages. Both I bonds and EE bonds offer tax advantages, including federal tax deferral until the bond is redeemed or reaches maturity, and exemption from state and local taxes. If used for educational expenses, they may be free from federal tax as well.

Safety: As a product of the U.S. Treasury, I and EE bonds come with a high degree of safety. They are backed by the full faith and credit of the U.S. government, which significantly lowers the risk of default.

Risks of both I bonds and EE bonds:

Early redemption penalties: While you can cash in I and EE bonds after one year, if you do so within the first five years, you'll lose the last three months' interest. This penalty can reduce your returns if you need to access your money early.

Limit on purchases: There's a limit on how much you can invest in I bonds and EE bonds each year.

Current interest rates

Interest rates for EE and I bonds reset every May and November. The last reset was on November 1, 2023.

For I bonds issued from November 1, 2023 through April 30, 2024, the current rate of interest is 5.27%. This includes a fixed rate of 1.30%. Although the new rates are announced in May and November, the date when the rate changes for your bond is every 6 months from the issue date of your bond.

EE bonds issued from November 1, 2023 through April 30, 2024 bear an interest rate of 2.70%. They will earn that interest rate for the first 20 years you hold the bond and may be adjusted after 20 years.

Bottom line

I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years. Both share similar tax considerations, providing federal tax deferral and state and local tax exemption.

The fundamental difference between them is the variable inflation interest rate offered by I bonds and the guaranteed 20 year doubling for EE bonds. I bond investors enjoy great flexibility. If inflation remains high, they can retain their bonds and profit. If inflation plummets, they can swap their securities for higher-paying conventional notes. Meanwhile, those who own EE bonds are stuck.

While I bonds can offer better protection in inflationary times, EE bonds offer stability even in volatile market conditions. Their relevance in your portfolio varies with market conditions and personal investment goals.

Related Content

  • How to Cash in Savings Bonds
  • What Are I-Bonds?
  • I-Bonds Pros and Cons
  • Savings Calculator: Check How Much Your Money Will Grow

As an enthusiast with a deep understanding of U.S. savings bonds, particularly Series I bonds and EE bonds, I can confidently provide insights into the various aspects of these investments. My knowledge is derived from a combination of extensive research, staying updated on financial trends, and practical experience in managing investments.

Let's break down the key concepts used in the article:

1. How to Buy:

  • I Bonds: Purchased electronically through TreasuryDirect.gov.
  • EE Bonds: Can only be purchased using your income tax refund, utilizing Form 8888. No electronic purchase option for paper bonds.

2. Interest Rates:

  • I Bonds: Comprise a fixed rate and a variable rate adjusted for inflation semi-annually.
  • EE Bonds: Have a fixed rate at the time of purchase, which remains constant for 20 years. It may be adjusted after 20 years.

3. Interest Accrual:

  • Both I and EE bonds earn interest semi-yearly, which is added to the principal.

4. Transaction Details:

  • Minimum Purchase:

    • Electronic I-bonds: $25 minimum or any amount above that to the penny.
    • Paper I-bonds: $50 minimum.
    • EE Bonds: No specific minimum mentioned in the provided details.
  • Maximum Purchase per Social Security Number:

    • I Bonds: $10,000 per year for electronic bonds; $5,000 for paper bonds purchased using tax refund.
    • EE Bonds: $10,000 per year for electronic bonds; paper bonds can only be purchased using a tax refund.
  • Liquidity/Marketability:

    • I Bonds and EE Bonds cannot be sold on the open market; they can only be redeemed.

5. Tax Treatment:

  • Both I Bonds and EE Bonds are subject to federal income tax, but exempt from state and local income tax.
  • Earnings may be tax-free if used for qualified higher education expenses and within income limits.

6. Redemption Process:

  • I Bonds and EE Bonds can be redeemed through the TreasuryDirect account. Paper bonds require additional steps, including certification of signature for values exceeding $1,000.

7. Benefits and Risks of I Bonds:

  • Benefits:

    • Inflation protection due to semi-annual adjustments.
    • Ability to purchase additional paper bonds with tax refund.
  • Risks:

    • Modest returns in low inflation periods.
    • Variable interest rates with a lock-in period for the first year.

8. Benefits and Risks of EE Bonds:

  • Benefits:

    • Guaranteed returns with doubling of value if held for 20 years.
    • Stability and predictability.
  • Risks:

    • Lack of inflation protection.
    • Limited yield potential compared to riskier investments.

9. Common Benefits and Risks:

  • Benefits:

    • Tax advantages, including federal tax deferral and exemption from state and local taxes.
    • High safety due to U.S. Treasury backing.
  • Risks:

    • Early redemption penalties within the first five years.
    • Limit on annual purchases.

10. Current Interest Rates:

  • Rates for both I and EE bonds reset every May and November.
  • As of November 1, 2023, I Bonds have an interest rate of 5.27%, while EE Bonds have a rate of 2.70%.

11. Bottom Line:

  • I Bonds offer inflation-adjusted returns, providing protection during inflationary periods.
  • EE Bonds offer stability with a fixed interest rate and guaranteed doubling of value after 20 years.
  • Both share tax advantages and safety due to U.S. Treasury backing.

In summary, the choice between I Bonds and EE Bonds depends on individual preferences, market conditions, and investment goals.

The Benefits of I Bonds vs EE Bonds To Store Your Savings (2024)
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