EE Bonds: A Long-Term Investment Tool Carmichael Hill

EE bonds are a little-known type of bond that can be accessed through the US Treasury. For EE bonds purchased at the time this article was published, the US government guarantees that the bond will double in value after 20 years. After the first 20 years the interest rate resets while the bond fully matures after 30 years. These bonds are unique and are worth considering for conservative accounts.[1]

The bonds are issued in denominations of $25 up to $10,000 and are now sold exclusively online through the US Treasury. You can name yourself as the owner of the bond, or you can name someone else as the owner. For example, if you would like the bond to be in the name of your child or grandchild, you can list it as such at the time of purchase.[2] Naming someone else as the owner effectively makes the bond a gift to that person.

The interest that these bonds earn are taxable to the owner. Interest is taxed as ordinary income, which means that it’s treated just like income earned from a job. $1,000 of interest from an EE bond is no different than getting a $1,000 bonus from a tax perspective. The bonds accrue interest monthly and are credited semi-annually, so the interest income you earn is reflected on your statements every six months. Most people pay the tax on these bonds when they cash them in, though you can choose to pay taxes on the interest income earned each year instead if you prefer.

There are also some nice tax benefits to holding EE Bonds. These bonds are not subject to state or local taxes. You will only ever pay Federal taxes on them. Additionally, you are only taxed on what you earn! This is true of any investment but is worth pointing out here as well. If you put in $1,000 and it doubled to $2,000 after 20 years, you will only be taxed on the $1,000 of gains. You aren’t taxed on the full $2,000 of bond value. [3, 4]

Additionally, the bonds are excluded from income tax if the bonds are cashed in while paying for qualified educational expenses (like college tuition). But there are some exclusions around this that you must be aware of:

  • You must be at least 24 years old or older for the bonds to qualify. This means that bonds issued in the name of kids and grandkids who later use them for college won’t quality. You must issue the bond in your name and later use them for a child’s higher education expenses if you wish to get the beneficial tax treatment.
  • Your modified adjusted gross income (MAGI) must be below the annual threshold limit. This limit adjusts every year, but for 2023 it is phased out completely at $106,850 if filing single or $167,800 if married filing jointly.
  • You must cash in the bonds in the same year you that you have the qualifying educational expenses.
  • These higher education expenses must be for you, your spouse, or one of the dependents you list on your tax return.
  • You do not file your taxes as married filing separately.

If all of those conditions are met, then you can exclude the interest from your series EE bonds![5]

Like any investment option, it’s important to know that your financial situation may or may not call for this investment. If you are curious about how you should be allocating your wealth to best benefit you and your family in the long term, then please reach out to our professionals and we can address your financial questions and discuss your situation.

 

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