Series EE U.S. Savings Bonds make sense because they are almost as liquid as money market funds and they provide safety of principal and a good yield. The only drawback is that you must hold on to them for at least 12 months before cashing in. Bonds redeemed during their first 5 years lose their last 3 months of interest.
These bonds, issued by the U.S. Treasury, are available online at the Treasury's web site, and may be available through your employer via payroll deduction. EE bonds are generally lower-risk investments because principal and interest are backed by the federal government. Bonds held electronically via TreasuryDirect are issued and purchased at face value. The maximum you can purchase is $10,000 face value per person per year. Series EE bonds earn interest for 30 years, and therefore can be used to fund long-term goals like education and retirement.
Series EE and I bonds have tax advantages—you'll never pay state or local income tax on the interest earned, and federal tax can be deferred until you redeem the bonds or they reach maturity. In addition, you may be eligible to exclude all or a portion of the interest if you redeem the bonds in the year in which you pay your child's college tuition. Contact your tax professional to determine if you qualify for the exclusion.
Series EE Bonds Issued May 1997 and After
All Series EE bonds issued on or after May 1, 2005 will earn fixed rates of interest for at least 20 years. This differs from earlier issues, which carried variable rates.
Series EE bonds issued on or after May 1, 1997 and prior to May 1, 2005 will earn interest based on five-year Treasury security yields right from the start. The rate for these Series EE bonds is 90% of the average yields on five-year Treasury Securities for the preceding six months. Series EE bonds will increase in value every month instead of every six months. Interest is compounded semiannually. A three-month interest penalty will apply to bonds cashed before five years.
Series EE Bonds Issued May 1, 1995 through April 30, 1997
Series EE bonds issued between May 1, 1995 and April 30, 1997 earn 85% of the three-month average of six-month Treasury Security yields for the first five years the bonds are held. From year six through seventeen, the bonds earn 85% of the six-month average of five-year Treasury Security yields. Interest is added to the value of the bonds every six months.
Series EE Bonds Issued Before May 1995
The rate at which these bonds earn interest depends on their issue date. Once the bonds are held for five years, interest is earned at either guaranteed minimum rates set at the time of issue, or market-based rates; whichever produces the higher redemption value.
Series I Bonds
Series I bonds are inflation-indexed treasury bonds that are intended to encourage Americans to save more by offering protection against future swings in the cost of living. The Series I bonds earnings rate is a combination of a fixed rate of return determined at issue, and a semiannual inflation rate. The semiannual inflation rate is combined with the fixed rate of the particular Series I bond to determine the bond's earnings rate for the next six months.
Series I Bonds earn interest for up to 30 years, and twice a year the earnings rate can change to reflect any change in the semiannual inflation rate. A three-month interest penalty will apply to bonds redeemed within the first five years; these bonds are meant to be longer-term investments. Series I bonds issued after February 1, 2003 must be held at least 12 months before they can be redeemed.
Interest earnings are added to the Series I Bond each month and interest is compounded semi-annually.
IMPORTANT NOTE: Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will likely decline as interest rates rise and bonds are subject to availability and change in price.