How Series EE Savings Bond interest rates work
Thursday, March 9th, 2006
Categorized as: Series EE US Savings Bonds • Savings Bond interest rates
If you're interested in finding out what interest rate your Savings Bonds are currently earning, just ask my Savings Bond Calculator. It will give you both the current rate and current value of your Savings Bonds.
Although Series EE Savings Bonds have a reputation of being an easily understood investment, few investors actually understand how they work. In part, this is because the Treasury has regularly changed the rules for calculating EE bond interest.
Understanding rate periods
Moreover, you can't understand Savings Bond interest rate rules unless you understand Savings Bond rate periods.
Every Savings Bond has a series of six-month rate periods that begin with the month in which the bond is issued. Today's Savings Bonds pay interest for 30 years, so they have 60 rate periods.
What's confusing is that the Treasury announces new interest rates for Savings Bonds in May and November, but the announced rates don't apply to a specific Saving Bond until its next rate period begins, which is zero (for bonds purchased in May or November) to five (for bonds purchased in April or October) months later.
Series EE Savings Bonds issued since May 2005
Since May 2005, newly issued Series EE Savings Bonds have come with interest rates that are fixed for 20 years - they pay the same rate for each of their first 40 rate periods.
However, when one of these bonds reaches its 20th anniversary, the Treasury has the right to change the fixed rate for the final ten years of the bond's life.
All Series EE Savings Bonds issued during the six-month period following a May or November rate announcement pay the same fixed rate.
The Treasury also guarantees that these Series EE bonds will double in value in 20 years. This creates a guaranteed rate of 3.50% if you hold the bond that long.
Series EE Savings Bonds issued between May 1997 and April 2005
Unlike newly issued Savings Bonds, all Series EE Savings Bonds issued in April 2005 and earlier have rates that adjust every six months.
The bonds issued during this eight-year period earn an interest rate during each six-month rate period that is 90% of the average yield for five-year Treasury securities in the previous November-April or May-October period.
Savings Bonds in this group that were issued in June 2003 and later are guaranteed to double in value in 20 years (this is an implied interest rate of 3.50%); for those issued in May 2003 and earlier the guarantee is 17 years (4.12%).
Series EE Savings Bonds issued between May 1995 and April 1997
The Series EE Savings Bonds issued during this two-year period are similar to the Series EE bonds issued later, however their rate is 85% (rather than 90%) of the average yield for five-year Treasury securities.
All Savings Bonds in this group are guaranteed to double in value in 17 years.
In addition, all Savings Bonds in this and earlier groups have redemption values that increase every six months. (For Savings Bonds issued in May 1997 and later, the redemption value increases monthly.) This creates a hidden redemption penalty of lost interest if you don't redeem right after the redemption value increases.
Series E and EE Savings Bonds issued before May 1995
Both Series E and Series EE Savings Bonds issued before May 1995 have rules that are very different from Series EE bonds issued later.
Interest rates on these bonds are calculated two different ways. At redemption, the method that provides the highest return is used to calculate the value of the bond.
One method uses a feature these Savings Bonds have called guaranteed rates. But to understand guaranteed rates, first you have to understand maturity periods (not to be confused with the rate periods we discussed earlier).
A Series EE Savings Bond's first maturity period lasts as many years as it takes the investment to double in value. The length of this first period depends on when the bond was issued. The bond's guaranteed rate during this first period is the rate that will accomplish this doubling in value.
All of the Savings Bonds in this group have already doubled in value except for those issued in March 1993 and later. Those bonds are guaranteed to double in value in 18 years (which creates a guaranteed rate of 3.89%).
When the original maturity period ends, the bond enters a new 10-year maturity period. At that time the Treasury can change the bond's guaranteed rate. Since March 1993, the Treasury has set the guaranteed rate for Savings Bonds entering new maturity periods at 4.00%.
The length of a Savings Bond's final maturity period is usually less than 10 years - it depends on the length of the first maturity period.
The second method used to determine the interest rate of these bonds is based on the average of a set of market-based rates (85% of the average of 5-year Treasury marketable security yields) published by the Treasury during the life of the bond.
Consequently, the interest earned during any particular rate period depends on which of the two methods will give the bond the highest value.
- If the first method is best, the bond will earn whatever rate is required to make its value reach the guaranteed rates in effect during its life.
- If the second method is best, the bond will earn whatever rate is required to make its value reach the average of the market-based rates published during its life.
In most rate periods the bonds in this group pay the highest rates of any EE bonds.
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Hi,
How does the treasury set rates on EE bonds? Are they tied to regular bond yields or something like that?
There's probably a link around here somewhere, I'll keep clicking.
Nico - I assume you mean the new fixed-rate EE bonds, as for all the others the rate setting method is described above.
For the fixed-rate EE's - the ones issued in May 2005 and later - the Treasury only says the rate is based on the 10-year Treasury rate.
As with the I bond fixed-base rate, the EE fixed rate is set administratively, which means the Treasury sets the rate without any publically-announced constraints, criteria, or rules.
Since we only have two data points, it's not really possible to figure out if the Treasury is using any criteria it's not talking about.
Nonetheless, for the record, as compared to the average daily rate for 10-year Treasury securities over the prior six months, EE rate announced in May 2005 was about 83% of the 10-year rate and EE rate announced in November 2005 was about 81% of the 10-year rate.
I have several 200 dollar series EE bonds purchased on July 17, 1984. When would be the best time to cash these in, in order to receive the largest amount of return on my investment?
Betty Jo - Put Tuesday, July 1, 2014 on your calendar as the best day to redeem your bonds. That's the day they stop earning interest.
Between now and then, the first business day of January and July are better than other days, because those are the days the value of your bonds increases because of an interest payment.
Current Rates Question - Older EE bonds.
I assume that each new 10 year period you mention above is what is called an 'extended maturity period' in the quote below from the government website discussing guaranteed minimum.
So, take an EE bond issued in May of 1981 - initial maturity of 8 years - - - so, the new 10 year maturity you mention starts in 1989 or there-abouts. That would seem to say the guaranteed mimium rate is adjusted to 6% for this bond.
Yet, the charts from the Feds say 4% is current rate for this bond.
So, I am thinking you meant to say at each subsequent 10 year maturity period the rate can be readjusted. Hence, the feds used the first bullet in the most recent adjustment.
Correct or all wet ?
From the Treasury's web site:
Kathie - you are correct. The Treasury has the right to change the guaranteed minimum rate at the end of each maturity period. The May 1981 bond in your example had an initial maturity period of 8 years - which is an interest rate of 8.85%. The guaranteed minimum rate was adjusted to 6% in May 1989 and to 4% in May 1999. It could be adjusted again in May 2009. The bond will stop earning interest in May 2011.
Tom Adams
I have several $100 denomination EE bonds purchased between Feb. 1991 and May of 1995. It appears that the newer ones are actually worth less than the the face value based on a calculation site that I visited.
Should I just cash all of these in and put the money in a better earning vehicle? My daughter starts college in fall of 2009.
Keith - You don't say how many "several" is, but most other investments have a $1,000 minimum and don't pay their highest rates until you have much more invested - usually $10,000 to $25,000 at least.
You may also be able to get a tax deduction if you use the bonds on your daughter's college tuition.
Tom Adams
I converted a Series EE bond into a CD in February, 2007, I know the total amount of interest earned on the date I converted and need to know what agency I report this amount to. IRS 1040 2007???????
Gladys - you report it on your 2007 1040 Income Tax Return, which isn't due until April 2008.
Between now and then, you and the IRS will receive a 1099-INT tax form with the amount of interest you should report on your 1040.
Tom Adams
My father, who works for the gov't, has purchased a $100 EE bond every month since 1979. His paycheck reveals that he paid $37.50 for the 09/07 EE bond. Your calculator says that the price was $50. Also, his lawyers feel that the bonds should be cashed and reinvested into a money market that the trustee could control. Can you explain the discrepancy of the cost for the bond and the pros and cons of reinvesting these bonds? BTW my father is 80yrs old.
Hi Michelle - I can't explain the figures you're quoting. Perhaps his employer matched a portion of the investment? Perhaps his employer used $12.50 from a previous month? $37.50 is how much a $50 E bond (which hasn't been issued since June 1980) would have cost.
Have the lawyers explained the tax consequences of cashing all these bonds at once to you? Do they even understand what the tax consequences are? Why would you give up bonds earning 4% for the lower rates and higher risk of a money market fund? Why not just re-register the Savings Bonds to the Trust? You are exactly the kind of person I wrote Savings Bond Advisor for. You need to spend a weekend reading it before you allow the lawyers to do anything with the Savings Bonds.
Tom Adams
Is there any penalty for deferring redemption of E bonds for a couple of years, for a tax advantage? Thank You!
Hi Tom - the first penalty is that you're not earning any interest. Within five years that penalty amounts to more than the taxes for most people.
In addition, the IRS says you owe the tax in the year the bond stops paying interest, no matter when you cash it. As a practical matter, it's fairly unusual for the 1099-INT that reports the interest to the IRS to be backdated to the year the bond stopped paying interest, but it does happen in some cases.
In that scenario the penalty would be that you'd have to file an amended return for a previous year and pay a penalty for late payment of the tax.
Tom Adams
Hi,
Is it better to hold the paper bonds or to put them into an electric account to hold them. Is there a better way for them to gain interest except to wait 30 years for them to mature completely? I'm not quite sure I understand. I believe all my bonds have not even hit the amount they were even purchased for. I have 2 bonds for every year since 1988 they were all purchased in either november, decemeber, march, or april.
THank you
I didn't mention but all my bonds are EE bonds with a 50$ denomination.
Hi Lauren - I prefer electronic, but it's a matter of personal preference; one way isn't better than the other for everyone.
EE bonds are purchased at half face value so your bonds were purchased for $25 each and they are all worth more than that.
The only way to accumulate interest is to hold on to the bonds until you need the money.
Tom Adams
We have 3 '$50' EE bonds from 12/90 and 11/91. Would it be any advantage for us to cash these in and purchase an I bond?
Also, my 89 yr old mother took some of her money and put it in 2 6 mo. CDs- $2500. ea. [I think that money was part of what she needs to withdraw from an IRA.] They come due next week. She asked me if she should put it in bonds instead. I ask you. Thank you.
Kay - your bonds are worth less than $200. The interest difference between EE and I won't pay for the gas to get to your bank to make the change.
Likewise, for your 89-year-old mother, the advantages and disadvantages of CDs and Savings Bonds tend to cancel each other out and leave just a misty fog. Whatever she prefers is best.
Tom Adams
Hi;
I inherited several EE bonds from my aunt who bought them in 8/89 and has my name listed along w/"POD" on the face of the bond. If I cash one of the $5K bonds, am I responsible for paying the total interest the bond has incurred? Does the bank issue me a statement to that effect? On the Savings Bond wizard program it shows the bond earned a little over $4K in interest for a current face worth of little over $6,500.
Thanks,
Hi David - yes, all the interest the bond has ever earned becomes part of your taxable income. The bank uses a 1099-INT tax form to report the income to the IRS (you get a copy).
If your name appears after the "POD", you'll need a copy of your aunt's death certificate to cash the bond.
Tom Adams
David's question "almost" answered mine. My nana died and my mom said that we would have to pay 1/2 the amount of bonds in interest. I do not understand. If I have a $5k purchased in 1987 how much taxes am I required to pay? with the economy we could really use the money
Robin - either you or your mother have misunderstood. The most you could possibly pay in taxes - if you were in the highest tax bracket - is 35% of the interest earned.
It wouldn't be a surprise if half the value of the bond was interest, but the government doesn't charge 100% tax on the interest.
You add the interest to your income tax form as income, then pay tax at your tax rate on the additional income.
Tom Adams
When my children were in school, years ago, they purchased savings stamps which were later redeemed for savings bonds. Are there stamps worth anything today?.
Tom - the information you're looking for is on my page about Savings Bond stamps.
Tom Adams
I have bonds from 1989, 1990, 1991, 1992, and 1993. I have paperwork that says that the interest rate is guaranteed. However, when I looked at the information on the computer, on some of them, the rates changed every month. Also, will the rates change on the accrual date? How can I find out how much the interest will be on the accrual date? Thank you.
Hi Jean - your question is a puzzle to me. I suspect you're looking at the lifetime "yield" of your bonds, which could change every month, not the current "rate", which hardly ever changes on EE bonds of this vintage.
I don't know what you mean by "accrual date".
Tom Adams
Mr. Adams,
I have 12 $50 EE Savings bonds from 1990-1995 in my name but one has an incorrect social security number. Can anything be done to change that? If not what should I do with it?
Thanks
Ben - see this post.
Tom Adams
Tom, I was given $50 EE Bonds during 85-89 and I'm wondering if I should leave them as is or cash in. At today's value they are not worth much more then their original value, (but do have a nice rate). After reading some of your advice to others and considering how I will be taxed I'm thinking I should just leave them alone. Do you have any advice? I would appreciate hearing from you!
I have 3 EEE Saving Bonds, 1 $50.00 1991 and 2 @00.00 1989. How much are they worht today and should I cash them in?
Tracey - Given that you've kept them this long without losing them, you might as well hold on until 2015, when the earliest one will stop earning interest.
Judith - Scroll up to the top of this page - on the right there's a calculator you can use to find out the value of your bonds. There's no particular reason to cash them now.
Tom Adams
I own a Series EE Bond and want to give it to my grandson as a gift. Can I transfer the bond to him? Thanx.
Bruce - you can, but you will owe income tax on the interest the bond has earned as of the transfer. And when your grandson eventually cashes the bond, the 1099-INT will report all the interest the bond has ever earned and he will be highly likely to pay the tax a second time. So it's a bad idea, but if you still want to do it, the information you need is here.
Tom Adams