Series I vs. EE Savings Bonds: What’s the Difference?

Series I vs. EE Savings Bonds: What's the Difference?I recently wrote about the fact that my wife and I were buying some Series I Savings Bonds. Following that post, I received several inquiries as to the differences between the two main flavors of savings bonds, known as “I Bonds” and “EE Bonds.” What follows is a brief comparison of the two.

Interest payments

As I’ve noted in the past, the I Bond interest rate is made up of two components, a fixed rate and a variable rate. The variable rate is intended to reflect recent inflation rates (CPI-U), whereas the fixed rate essentially represents a premium over inflation.

In the case of EE Bonds, your investment is subject to a fixed rate of return that is set at purchase. Things can, however, get a little strange when it comes to purchasing EE Bonds. The reason for this is that online and paper purchases are treated somewhat differently.

When purchasing online, EE Bonds are bought at face value and they earn the fixed rate for up to 30 years (20 years + a 10 year “extended maturity” period). Beyond this, these bonds are guaranteed to double in value no later than 20 years after purchase. If the value hasn’t doubled at this point, the Treasury will make a one-time adjustment to make up the difference.

Paper EE Bonds are likewise subject to a fixed rate of return, but you purchase them at half of face value, and can then redeem them for face value at maturity. In other words, they’ll still double over 20 years.

Using the Rule of 72, you can easily determine that this doubling in 20 years works out to a minimum annual return of slightly better than 3.50% — assuming you hold them to maturity. If you break your EE Bonds early, you’ll receive your principal plus the accrued interest (minus penalties) based on the applicable fixed rate.

Current rates can be found here: I BondsEE Bonds


Both I Bonds and EE Bonds can be redeemed as soon as 12 months after purchase, though there is a penalty of 3 months of interest if you redeem within 5 years. These bonds technically mature in 20 years, though you can continue earning the applicable fixed rate for an additional 10 years after that.

Purchase limits

You are limited to purchasing $5k worth of Savings Bonds per year per social security number through each of two channels — electronic and paper. Electronic bonds purchases are made online at TreasuryDirect, whereas paper purchases can be made in person at most banks.

This purchase limit applies separately to I Bonds and EE Bonds, so you could actually buy up to $10k ($5k electronic and $5k paper) of each type per social security number, or $20k combined in any given year.

Tax treatment

Interest payments on both I Bonds and EE Bonds are exempt from state and local income taxes (yay!). This means that their tax equivalent yield will be higher than for equally priced, fully taxable bonds.

In addition, the federal taxes on income from both I Bonds and EE Bonds can be deferred until redemption. And guess what? If you use the proceeds to pay for college education, the interest will ultimately be income tax free (subject to restrictions; details).

Which is the better? I Bonds or EE Bonds?

So which is a better investment? I Bonds or EE Bonds? I’m not in the business of offering personalized financial advice, but I’m perfectly willing to share with you what we’re doing…

We recently purchased our annual allotment of I Bonds, and will likely continue to do so in coming years. In recent years, I Bonds have typically outpaced EE Bonds, and they also provide a bit of inflation protection for what is essentially (after 12 months) a liquid investment.

The downside of I Bonds is that they could earn very, very little in periods of deflation. In fact, the inflation rate was sufficiently negative during the Great Recession that the variable rate wiped out the fixed rate, and I Bonds yielded 0% for awhile.

Of course, this is just one piece of our overall asset allocation puzzle, so don’t read too much into it. We’re also heavily invested in both the stock and bond markets (via index funds).

What about you? Do you have savings bonds as part of your investment portfolio? If so, which do you prefer, I Bonds or EE Bonds?

7 Responses to “Series I vs. EE Savings Bonds: What’s the Difference?”

  1. Anonymous

    My mom passed away in couple months ago ,so i found 42 paper of each $100.00 saving bonds. I really have no idea how much is it worth from 1966 till 1986 . It was bought from delta air line from my dad . He passed away in 2008

  2. Anonymous

    I purchased two EE bonds in college (back in 2003) and didn’t even know what I was doing…or why. I simply did it at the behest of an ex-boyfriend but I’m glad I did. I look forward to making more purchases in the future!

    Excellent post. 🙂

  3. Anonymous

    Ok- so what I’m confused about is…. if I buy an electronic EE and pay face value- say $5000. is it guaranteed to double in 20 years? That certainly beats the 1.4 percent rate that is offered Oct. 2010 OR is it just the paper EE available at 1/2 face value that is quaranteed to double (to what the face value shows?)

    If not, does that mean the electronic EE, purchased at face value is only going to increase by 1.4 percent over 20 or 30 years, since that is the rate when it was purchased?


  4. Anonymous

    Yeah, the double-face value of the EE paper bonds is nothing more than a marking gimmick. A $5000 EE electronic bond is exactly equivalent to a $10000 EE paper bond.

    For deciding between an I and EE savings bond, the book Savings Bond Advisor suggests looking at the difference between the EE bond rate and the fixed rate of the I bond. If you believe inflation will be higher than the difference, you should buy I bonds, else you should buy EE bonds.

    Example: May 2010 purchase, will be held for 5 to 19 years
    1.4% [EE rate] – 0.2% [I fixed rate] = 1.2%
    No brainer to me, since I definitely believe that inflation will be higher than 1.2%, the I savings bond is better.

    So, unless you’re really, really sure you will hold the bond for 20 years, I think that I savings bonds are a no-brainer. EE bonds could still be useful, though, if you live in a place with high state and/or local income taxes and you’ve maxed out your I savings bond purchases…

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