How to Double Your Money Guaranteed With Series EE Bonds

A lot of grandpas and grandmas—and a few parents, too—have been buying Series EE government bonds over the years to send kids to college. It’s a pretty good deal; you plunk down $50 today and in 20 years it’s worth $100—guaranteed.

The problem is that too many bond holders want to redeem those bonds when the kids start college at age 18.

The bonds are guaranteed to double at 20 years, but if you want to cash them in before then you will only get the value of the bond at that time. For instance, if the bonds are earning 0.6 percent interest—the current rate—they’ll only be worth $56 in 19 years. But if you hold them to 20 years, you will get the guaranteed $100.

You’re giving up a lot of interest if you sell before the 20 years is up. You’re getting short-changed by the government unless the interest rate, which is set every six months, is 3.5 percent, as we have had in the past.  In the low-rate environment we’re in, we won’t get that. It would take 115 years to double at 0.6 percent.

The Series EE bonds, which are guaranteed to double at 20 years, will continue to accrue interest up to 30 years. After that, they don’t grow.

Unfortunately there are a lot of Series EE bonds that were purchased more than 30 years ago that are not being redeemed. Holders of those bonds are not making anything on them. We recommend to our clients that they cash in those bonds and invest them in something where they can gain some interest.

The paper bonds are available at banks, but only until December 31, 2011.  After that, online purchases can be made through TreasuryDirect®, a secure, web-based system operated by Public Debt.  For the $100 bond that is guaranteed at 20 years, one would pay half the face value at $50.  However, they can also be purchased electronically, and those bonds are sold at face value with interest accruing thereafter.  The government limits the annual purchase of Series EE bonds at $5,000.

Interest on Series EE bonds is subject to federal income tax, but not to state or local income tax. Interest is not taxable until the year the bonds are cashed. However, interest earned on certain Series EE bonds used to pay for college tuition may be tax free.

Series EE bonds were first offered in January, 1980. They are guaranteed at 20 years and can grow for 30 years. Before July, 1980, Series E bonds were issued. The original 10-year maturity period of Series E bonds has been extended to 40 years for bonds issued before December, 1965, and 30 years for bonds issued after November, 1965.

Series EE bonds purchased after April 30, 1997, and before May 1, 2005, earn interest based on 90 percent of the average yields on five-year Treasury securities for the preceding six months. These bonds  increase in value every month and interest is compounded semi-annually. If the bond does not reach its face value after 17 years, a one-time adjustment is made to increase the bond’s redemption values to its face value.

Those bonds issued after April 30, 2005, earn a fixed interest rate that depends on the issue date. The rate applies for at least 20 years. These paper Series EE bonds are guaranteed to reach the state maturity value (double the issue price) after 20 yeas or the value will be adjusted accordingly. Bonds must be held five years prior to redemption to avoid a three-month interest penalty.

About the author

Walt Mozdzer, CFP®, CAP

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