What is the Difference Between EE and I Bonds?

ee and i bonds

If you’re considering investments in savings bonds, it’s wise to have an understanding of the different types and how they can affect your investment portfolio. There are two main types of savings bonds. These include EE and I bonds, but what is the difference between them, and which is better? Here is everything you need to know about EE and I bonds to help you decide which would be the best option for your situation.

What is an EE Series savings bond?

According to Treasury Direct, EE savings bonds are available for purchase in digital form only. They are securities sold through the US Department of the Treasury. These are electronic bonds that are sold at face value in any amount of $25 or more. The interest earnings on an EE bond depends on when they were originally purchased. Fixed rates were set for bonds issued in May of 2005 through the present. The bonds issued from May of 1997 through April of 2005 were sold with variable interest rates. The maximum amount that you can buy is up to $10,000. The interest in EE savings bonds is earned monthly and compounded semiannually for 30 years. The maturity date of EE savings bonds is 20 years. You may cash these bonds at any time after 12 months from the date of purchase. If you cash them in during the first five years you will lose three months of interest as a penalty. This means that if you cash an EE bond in after 18 months, you only get 15 months of interest.

What is an I Series savings bond?

I bonds are securities sold by the US Department of the Treasury. They may be purchased in paper and you are allowed to buy them at face value with your IRS tax refund. A $50 bond is priced at a face value of $50. They also come in digital form. The minimum face value is $25. You may buy them in any amount. I bonds accrue interest at a fixed rate with an inflation rate calculated twice a year. The bond accrues interest monthly, compounded semiannually until the bond reaches maturity at 20 years. You may redeem the bond after 12 months from the date of purchase. If you cash it in during the first five years you will lose three months of interest as a penalty.

What are the differences between Series EE and Series I savings bonds?

There are several extreme differences between Series EE and Series I savings bonds. The most obvious is that the I bonds are available in electronic form or printed paper bonds. You can no longer purchase Series EE savings bonds in paper form. You can purchase up to $5,000 in Series I savings bonds with your tax return in paper form. This limitation does not exist for the electronic I or the Series EE.

According to The Nest, Series EE bonds come with a variable interest rate. Series I bonds have a fixed rate. The Series I bonds are streamlined with a predictable yield structure. The interest rate is set twice every year for six months. The bonds maintain that interest rate until it is redeemed. There is an inflation guard built into the yield structure that allows for changes in the interest rate at the six-month intervals, associated with the Consumer Price Index. The rate can never stop at zero or fall into the negative. This system preserves the earning potential of I bonds.

Series EE bonds belong to a new system of electronic issuance that sets the face value automatically at the time that the bond is issued. A flexible tool of adjustment makes the bond more flexible during times when the interest rate fluctuates. The differences between the two savings bond types are slight. Investments in Series EE savings bonds guarantee an annual return of 3.5 percent of a period of 20 years when the bond will mature to its full face value. It can be held over to draw interest for an additional 10 years. At the 30 year mark, it stops accruing interest. The ideal time to cash in an EE bond is at year 30.

According to Investopedia, Series EE bonds are guaranteed to double in the face value at the time of its 20-year maturity. It will further yield interest if allowed to reach year 30 with a fixed interest rate of return. Series I bonds have no guarantee of value at the time of maturity. They carry a fixed rate plus an adjustable interest rate that is based on inflation.

Which is better?

Series I savings bonds grow in interest at a faster rate than many other guaranteed investments during typical economic cycles. According to the Journal of Accountancy, electronic bonds can be purchased at a maximum of $60,000 face value per year and paper bonds at a maximum of $30,000 per year. Some investors prefer Series EE savings bonds because of the guarantee that they will reach their maturity at face value in 20 years with an annual rate of just over 3.5% with compounding semi-annually. They will double the amount that the investor pays for them during this period. The owner of the bonds may opt to continue to allow interest to accrue for an additional 10 years and cash them out at year 30 for the maximum return on investment. Series I savings bonds do not offer this guarantee.

Final thoughts

There are more similarities among EE and I savings bonds than there are differences. Between the two types of savings bonds, EE and I Series, one is not better than the other, but there are slight differences in the interest rates and the available formats. It’s always wise to consult with your financial advisor before deciding which investment is the best option for your portfolio.

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