Series EE Bonds

Series EE Bonds were a thing when I was a child.  Many investors probably don’t know that they still exist, but they do, although you can only buy $10,000 per year (per person) of EE Bonds.  They exist now only in electronic form, and you can buy them only if you set up an account at a government website called treasurydirect.gov.  

Paper EE’s don’t exist any more.  Only electronic.

Double in 20 Years

What I like about EE Bonds is that they are guaranteed to double in 20 years, backed by the full faith and credit of the US Government.  That means if you buy $10,000 of EE Bonds in 2018, you will have $20,000 of EE Bonds to redeem in 2038.  This makes the effective interest rate of EE Bonds about 3.5%.  You should buy EE Bonds only if you plan to hold them for the full 20 years because you forfeit a lot of interest if you redeem (i.e., sell) the EE bonds early.

Taxes

Interest on any US Government bond (such as the EE Bond) is taxable at the US Government level only – not at the state or local level.  For EE Bonds, although interest is accrued to your account every year, you don’t have to pay taxes until you redeem your EE Bonds.  That means you don’t have to pay taxes each year on “phantom income.”

Pay for College

Series EE Bonds are a great way to save for your child’s (or grandchild’s) college education.  You can buy EE Bonds in addition to contributions that you make to a 529 Plan or other college savings plan.  You, as parents (or grandparents), buy and hold the bonds in your name and name the child as beneficiary.  That way the child has no “kiddie tax” issue.  (More on that in a later posting.)  You may also be able to exclude (i.e., not pay taxes on) a part of the EE bond interest, but only if you redeem the EE Bonds in the same year as you have to pay your child’s qualified education expenses and only if your AGI is below about $150,000 jointly (for this year).  

Example

To use EE Bonds to pay for college, there are several ways to accomplish your goal.  For all, I am assuming you are married so that you can buy $10,000 per person or $20,000 total of EE Bonds per year, meaning that in 20 years your student will have $40,000 to pay for college since the face amount is guaranteed to double.  The most straightforward way is for each parent to buy the maximum when they get pregnant or when the baby is born.  Keep the EE Bonds in the parents’ name at this point.  EE Bonds mature in 20 years, but college starts in 18, so you may have a couple of years to bridge.  You can:

  • Use other savings such as the 529 Account to pay for the first 2 years of college, then redeem EE Bonds to pay for the last 2 years.
  • Borrow through Qualified Student Loans and use proceeds from matured EE Bonds to pay off the student loans afterward.  You don’t get the tax benefits this way but at least you have a source to pay of student loans.
  • Go to junior college for 2 years, then use EE Bond proceeds to pay for the Bachelor’s Degree program.
  • Redshirt your child in grade school so that they don’t start college until 19 – that is if you can stand having them around your house for an extra year.  
  • Better yet, have your child work after high school and then go to college.  Probably won’t fly with the kid, but it is an option.

IMO

I am writing this post because I’m guessing many people don’t know that Series EE Bonds still exist and that they still present an excellent opportunity for long-term savings, whether for college or for any other goal.  It is easy, since all you have to do is go to the treasurydirect.gov website and open an account.  EE Bonds enforce discipline because their full benefit is realized only if you hold them for the full 20 years.  I recommend you consider EE Bonds as part of your overall savings plan.