series EE bonds: how the doubling guarantee works

In short

A friend of mine once found a Series EE bond in his late mother's desk drawer, and he asked me what in the world it was worth. If you are holding one, or thinking about buying one, the answer begins with a promise. The Treasury's savings bond pages describe a promise about the 20 year mark, where an EE bond is worth at least double its price. If the interest the bond has earned by then falls short of that, the Treasury makes up the difference in one lump. After year 20 the bond keeps earning for a time, and the Treasury's pages give the exact end date. Interest is added every month and paid out when the bond is cashed. Cash it in the first five years and the Treasury takes the last three months of interest. Those are the plain facts, and the rest of this page shows how they fit together.

The whole of it

What it is

I once watched a neighbor tuck a savings bond into a Bible and forget about it for thirty years. That is about how these bonds were meant to be used. A Series EE bond is a savings bond sold by the United States Treasury, and you can buy one in electronic form at TreasuryDirect, the Treasury's own website. The buyer lends money to the government. The government pays that money back later with interest added.

Here is the part that surprises people. The doubling guarantee is a promise about the 20 year mark, and it is not a promise about the interest rate. Today the Treasury sets a fixed rate when the bond is issued, and that rate stays the same for the life of the bond. The current rate is the current figure, which the official source publishes each year. If that fixed rate would not double your money in 20 years, the Treasury steps in and adjusts the value up to exactly double. That one time adjustment is the guarantee.

How it works

If you are wondering what happens to a bond month by month, picture a pot that grows a little every thirty days. Interest is added to the bond each month, and it is compounded twice a year. Compounded means that earlier interest starts earning interest of its own. You do not receive a check along the way. The money stays in the bond until the bond is cashed.

Now picture the first 20 years. The bond grows at its fixed rate. At the end of year 20, the Treasury looks at the value. If the value is below double the price paid, the Treasury adds enough to bring it to double. If the value is already above double, nothing is added, because the guarantee is a floor and not a ceiling. Then the bond keeps growing at the same fixed rate for a time. The Treasury's pages tell the owner when the bond stops earning.

There are a few rules about timing. The Treasury sets a waiting period at the start, and its pages say how long it lasts. If it is cashed before five years pass, the owner loses the last three months of interest. After five years, there is no such penalty. The Treasury sets these rules, and they are written on its own savings bond pages.

The numbers, and where to find yours

Most of the figures that matter are set by the Treasury, and they change. The fixed rate on newly issued bonds is the current figure, which the official source publishes each year. The most that one person can buy in electronic EE bonds in one calendar year is the current figure, which the official source publishes each year. The minimum purchase is the current figure, which the official source publishes each year. Check each of these on TreasuryDirect before you rely on them, because the site fills in the verified figure with its source and date.

If you own an old paper bond, your numbers live in a different place. Each bond carries an issue date, and that date decides the rate rules that apply to it. Bonds from earlier years followed different rules, and some do not carry a doubling guarantee at all. The Treasury offers a tool called the Savings Bond Calculator on its TreasuryDirect site. Type in the series, the denomination, and the issue date, and it returns the current value and the interest earned. Use it before you assume anything about an old bond.

A worked example

Let me tell you about a woman named Ruth Ellison. Ruth bought an electronic Series EE bond for $5,000, and the bond carried a fixed rate of 2 percent. She was planning to hold it for 20 years.

Here is what her bond earns on its own. At 2 percent a year, compounded twice a year, $5,000 grows by a factor of about 1.486 over 20 years. That is $5,000 times 1.486, which is about $7,430. Her interest alone brings her to roughly $7,430 at year 20.

Now the guarantee does its work. Double the price paid is $5,000 times 2, which is $10,000. Her bond is worth only about $7,430 on its own, and that is below $10,000. So the Treasury adds the gap. The gap is $10,000 minus $7,430, which is $2,570. At year 20, Ruth's bond is worth $10,000.

After year 20, the bond keeps earning at 2 percent. That is on top of the $10,000, and it continues until the final date the Treasury sets. Ruth can cash the bond any time after the five year mark without losing interest. If she cashes it at year 20, she receives $10,000. If she waits longer, she receives more.

Notice what the guarantee did here. Over 20 years, Ruth's money earned an effective yearly rate of about 3.5 percent, even though the stated rate was only 2 percent. The sizable one time lift at year 20 is where the difference came from. That is a fair way to see why people say the bond rewards patience.

Where it goes wrong

I have seen plenty of folks stumble on this, and it is usually from assuming too much. The most common mistake is thinking the doubling happens somewhere before year 20. It does not. Cash the bond at year 15, and the owner gets the interest earned so far, with no adjustment. The guarantee lives at year 20 and nowhere else.

Another slip is cashing a bond within the first five years. The owner then forfeits the last three months of interest. That is a real cost, and it is easy to avoid by waiting.

A third trouble is treating an old paper bond like a new one. Bonds issued in earlier years followed other rules. Some paid rates that changed over time, and some do not carry the 20 year guarantee. Reading the issue date matters here. The Treasury lists the rules by issue date on its site.

There is also the matter of tax. Interest on savings bonds is subject to federal income tax, but it is exempt from state and local income tax. The owner can choose to report the interest each year, or to wait and report it all when the bond is cashed or reaches final maturity. The doubling adjustment counts as interest too. In Ruth's case, that means the $2,570 lift shows up as income at the time she cashes the bond. Her tax professional or the IRS can explain how that fits her own return. Some people can exclude the interest from tax when it pays for qualified college costs, but that exclusion has income limits and other conditions that the IRS spells out in its publications.

Last, a bond that stops earning is easy to forget. Every bond has a final date after which interest ends. A bond left in a drawer past that date earns nothing more. Hold on to the paperwork, and keep track of the dates.

Questions to answer before you leave this page

Do you know the issue date of the bond you hold, or the one you are thinking about buying, and have you checked which rules go with that date? Are you comfortable leaving this money alone for 20 years, knowing the guarantee only pays at that mark? Have you looked at the current fixed rate on TreasuryDirect, and do you understand that the rate itself will not change after purchase? If you cash early, can you live with losing three months of interest before year five? Have you thought about when you want to report the interest for tax, and have you asked a tax professional or read the IRS guidance about it? And finally, if you found a bond in a drawer today, would you know where to look up what it is worth?