Whether it’s the cancellation charges in your cell phone contract, the hidden fees extracted by your financial institution, or the long list of exclusions hidden in your insurance policy, the fine print always ends up costing you more money than you were expecting to pay.  However, I was pleasantly surprised when I learned about fine print that actually favors the retail customer:

“The Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond’s issue date to make up the difference.  EE Bonds continue to earn interest for up to 30 years.”


The Series EE Savings Bond currently pays a fixed annual interest of 0.1% for 20 years, then offers a variable rate beyond that.  Every man, woman, and child with a Social Security number can invest up to $10,000 per year in Series EE Savings Bonds directly with the U.S. Treasury. While it would seem crazy to invest in a bond that pays only 0.1% interest for 20 years, reading the fine print reveals that the Treasury makes a “one-time adjustment” that makes your $10,000 investment worth $20,000.  This comes out to 3.5% interest compounding annually, guaranteed!

Here are some of the other benefits:

  • $0 in fees or commissions.  No need to pay hidden markups on individual bonds and annuals fees on bond funds.
  • Easy online purchases and redemptions through TreasuryDirect.gov.
  • The interest is TAX-DEFERRED until the bond is redeemed (or may be paid annually if that is more beneficial).
  • Taxes can be deferred beyond 20 years by delaying redemption an additional 10 years while the bonds continues to accrue interest at a new rate.
  • The interest is TAX-EXEMPT from state taxes.
  • You can cash in the bond with NO PENALTY after 5 years and with a penalty of only 3 months interest after 1 year.
  • If the bond is used to pay tuition for a child, the interest is TAX-FREE, subject to income limits.
  • If the bond is purchased in the name of a child, the child may pay lower taxes if you choose to pay taxes on the interest annually.

In summary, the Series EE Bond can be used like a flexible, low-cost, tax-sheltered annuity that can be used to fund your retirement or used to pay for a child’s higher education with the backing of the U.S. Treasury.  While I recognize that Series EE Bonds are only a small piece of the puzzle, if $10k per year is invested for every person in your family, it can begin to replace some of the more expensive bonds in your portfolio that have higher default risk and more interest rate risk.