Features of Series EE Savings Bonds You May Not Know

When you were a little kid, you may remember getting a US Savings Bond in your birthday card from your grandparents or your aunts/uncles. While it didn't seem to be an exciting gift at the time, there are some pretty interesting features about these bonds that you many not know...even as an adult. 

I recently came across an article in Wealth Management, about some surprising features of US Series EE Savings Bonds that are really cool:

1. What Exactly are Series 'EE' Savings Bonds? - These bonds are direct obligations of the United States Treasury. They are available for purchase online at www.treasurydirect.gov, and fully mature after 30 years. The annual interest rate for Series EE savings bonds is currently a paltry 0.1 percent, which is in effect for the life of the bond. However, there is actually a hidden twist that can help you get a much better interest rate.

2. You can effectively double your money - Did you know, that the US Treasury Department guarantees that holders of Series EE savings bonds will double their initial investment, once the bonds have been held for at least 20 years? It's true! That would work out to about a 3.5% annual yield, which compares very favorably to the 2.27% that the 20-year Treasury bond paid as of Oct. 28, 2016. But unlike the Treasury equivalent, holders of Series EE bonds have no risk of a market-induced loss. However, you have to make a commitment to not redeem before 20 years, otherwise you could end up with a lot less money (i.e. the dismal 0.1%).

3. Savings Bonds are Exempt from State Taxes - Like Treasury bills, Savings Bonds' interest is exempt from state taxation. However, unlike Treasuries, bond holders can make a choice to either declare the interest (and pay taxes on the interest) as interest is earned each year, or wait until the bonds mature (or you redeem them early) and pay taxes on all of the interest accrued. Why is this important? Well it can mean a big difference in savings especially if you plan to use the bonds for a common purpose like retirement or college. 

4. Give Retirement Savings a Boost - So you put all of your retirement savings into 401(k)s, IRAs, and Roth IRAs. Cool. If you have any money left over, you should consider purchasing Series EE savings bonds because in the short term, they will get yields that are similar to the rates currently paid on money market accounts, in addition to being risk-free and maintaining liquidity. However, if you are able to hold onto them for 20 years, they will return 100% on the initial investment and there is no penalty to cash them in. Yes, you will have to pay taxes on the interest, but at retirement, you'll be in a lower tax bracket than if you declared the interest while still working. 

5. Pay for College - While grandparents are not eligible to use the higher education interest exemption for savings bonds proceeds, unless they count the grandchild in question as a dependent. But they could gift funds to the parents of the grandchild now, with the understanding that the money will be used to purchase savings bonds owned by the parents.

Some individuals will be interested in using the Series EE money-doubling loophole as a tool to save for higher education expenses. Let’s say the parents of a newborn baby purchase $10,000 of Series EE savings bonds today, in their name. They would choose to defer paying taxes on the interest until the bonds are redeemed, or mature in 30 years. In 20 years those bonds will be worth $20,000. If the parents then redeem the bonds and also pay for qualified higher education expenses in the calendar year of redemption, the interest could be tax-free. That is, if the parents’ income in that year is below certain limits.

6. It's the Gift that Keeps on Giving - Your grandparents definitely knew this even if your parents didn't. While your grandparents may not get a tax break on higher education costs, they can purchase savings bonds for their grandchildren as gifts to help them with these expenses. They can either buy the bonds now using the name and Social Security number of the child in question or purchase the bonds in their own name today and decide at some point to transfer the bonds to the grandchild’s ownership (or not). The Treasury Direct website even provides a gift certificate that the givers can customize, print out and present to the recipients (I even have some old ones from the late 1980s). 

7. Some Downsides to Owning EE Bonds - Bonds can’t be purchased in tax-sheltered retirement accounts like IRAs and Roth IRAs. Although savings bonds can be bought for as little as $25, the maximum annual amount individuals can purchase is $10,000 per person per calendar year.