A complete overview of EE Series Bonds

(c) Copyright 2006 by Harold Pennington

Interest Penalty on Series EE Savings Bonds

An interest penalty of three-month's worth of interest will be applied to bonds held less than five years from issue date. This rewards longer-term bond holders who benefit from higher 5-year rates over the full life of the bond.

For example, if you buy an EE Series Bond and redeem it 24 months later, you’ll get back your original investment and 21 months’ worth of interest. The value of the bond would be based on the announced rates applied over the initial 21-month period.

Tax Advantages of Series EE Savings Bonds

My favorite consideration about any given investment is always how well it gets around taxation. Considering this is issued by the government, it should have a good advantage here too, and it does. First off, all interest earned on your Series EE Bonds is exempt from state and local income taxes. Also, you can defer federal income tax until you redeem the bond, or it stops earning interest after 30 years.

Finally, special tax benefits are available for many different types of educational savings. If you qualify, you can exclude all or part of the interest earned on EE Bonds from income when the bonds are redeemed to pay for post-secondary tuition and fees.

So basically, the only tax you'll ever have to pay on these great little investments is when you redeem them, only on the federal level, and then only if you can't find some way to credit some form of educational experience by you, your spouse, or one of your dependants.

Compared to higher-yield investments like Mutual funds, the taxation benefits on Series EE Bonds alone make this a much more attractive option.

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