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Series EE Bonds Vs. Series I Bonds: U.S. Savings Bond Comparison

Summary

There are two kinds of savings bonds available today.

Neither is a great investment because interest rates are so low.

There are better options for parents investing on behalf of kids.

There are two kinds of savings bonds available today: Series EE and Series I. Neither is a great investment because interest rates are so low. If you buy a $100 EE bond for a newborn child, that same bond will be worth $102 when that child is attending college 19 years from now! EE bonds are guaranteed to double in value after 20 years, but that one-time adjustment only works out to a 3.53% rate of return (if you're patient enough to hold the bond that long). 

Series I bonds have a two-part interest rate: a fixed rate that never changes (right now it's 0.10%) and an inflation adjustment that is recalculated every six months. This "composite" rate is 2.58% right now: not nearly enough to offset the rising cost of attending college.

  Series EE

Series I

Minimum Purchase

$25 (for electronic bond)

$25 (for electronic bond)

Maximum Investment

$10,000 per year per Social Security number

$10,000 per year per Social Security number*

Earliest Redemption

12 months

12 months

Penalties

3 month's interest if redeemed within 5 years

3 month's interest if redeemed within 5 years

Interest Rate

0.10%

0.10% fixed rate + CPI-U based (inflation) rate

Special Adjustments

Value doubles in year 20; possible rate change for years 21-30

Inflation rate adjusted every 6 months

Compounding

Semiannual

Semiannual

Tax Deductibility

State and Local (and Federal, if qualified)

State and Local (and Federal, if qualified)

Impact on Financial Aid

High impact if held in child's name

High impact if held in child's name

*A taxpayer who receives an IRS refund that is $5,000 or greater can invest up to $15,000 per year in Series I savings bonds: $10,000 in electronic bonds plus $5,000 in paper bonds.

Savings bond interest is exempt from state and local taxes. You can avoid federal tax too if the redeemed bonds are used for qualified educational expenses (and if you meet certain requirements). Bonds that are registered in your child's name have a higher (negative) impact on his or her eligibility for financial aid and will not qualify for federal tax exemptions. Grandparents, take note.

Parents who really want to invest in bonds on behalf of their children may find better interest rates and preferable financial aid treatment if they invest in a U.S. government bond fund within a 529 plan or Coverdell account.

This article is an excerpt from The Best and Worst Investments You Can Make for Your Child, published in full on my website: johnwdefeo.com.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This article is not personalized financial advice and shouldn't be treated as if it were. I believe that all of the information written above is true and accurate (at the time it was published).