5 Reasons Why I Love EE Savings Bonds

Last week I wrote about why I hate EE Savings Bonds. I hate them because of how people use them – they use them wrong and I explain why here. Objectively, though, I love them. Here’s why:

1. They are totally tax-free when used for education. Kidding, I don’t give a shit about this. I don’t have kids, and I’m not gonna be that mothball-smelling aunt that gives the kid a $50 EE Savings Bond to “contribute to her education”. Fuck that, I’m buying Astronaut Barbie for my niece. If you have kids or are a killjoy, then read up on it here.

Bonus: if you do buy your kid EE Savings Bonds for her college fund, you can totally pay taxes on the interest annually before the bonds mature and/or are cashed in. Your 5 year old kid is probably in the 10% federal income tax bracket, so that’d be a cool way to pay super low taxes on the interest. *Note: there’s a no-backsies rule on this – once you decide to do this, you can’t change your mind. Alternatively, you can let your kid pay the taxes upon its maturity when he’s probably around 18 – fuck him, he needs to learn responsibility at some point, right?

The huge drawback of using EE Savings Bonds as college savings is that you really shouldn’t cash them in in less than 20 years unless in an emergency. So either start buying these when you’re thinking about getting pregnant, or make your kid wait until the bonds mature to face value. Otherwise, look at 529s instead.

2. They are totally state & local tax free. A-ha. Now we’re getting somewhere. While the interest earned on EE Savings Bonds are subject to federal income taxes (with some exceptions like education and disasters), states and local governments – ahem: NYC – cannot touch them. If you live in a high tax state or city *cough NYC cough*, this makes up for the relatively low interest you earn. Californians and New Yorkers, take notice. Floridians & Texans: fuck you with your perpetual sunshine and state tax-free incomes!

3. Guaranteed 3.6-ish% interest rate. Let’s face it: the interest rate on these bonds are shit. It’s 0.10%. That’s crap, you can make more just parking your money in an Ally Savings account. BUT if you hang onto the bond for at least 20 years, you double your money. It doesn’t matter what interest rate you get before then, once the bond hits 20 years old, the US Treasury guarantees to bring up the value of the bond to face value. That’s double. Doubling in 20 years is a 3.6% interest rate.

Tack on whatever you save from your state & local tax exemption (I’m looking at you, Hawaiians), and you’re looking at a pretty decent guaranteed return. That’s almost the same kind of return you get by paying off your mortgage early. Alaskans and Washingtonians: again, fuck you with your state tax-free incomes!

4. They’re tax-deferred. Hey, the whole reason you invest in your 401k is because the taxes are deferred, right? That’s worth something, otherwise you’d just invest in your taxable accounts all the time. But 401ks, and other tax-advantaged accounts like Roth IRAs, have annual limits. When you hit those limits (and my opinion is that you should), the next place to look for tax advantages in your investments can include EE Savings Bonds (and munis, but that’s a conversation for another time). 

Why is deferring your taxes a good thing? It’s because you will probably be in a lower income tax bracket in your retirement than you are when you’re working. Winner, you. Note that there is a $10k limit for buying EE Savings Bonds, although if you ask for your tax refund in the form of a Series I Bond, you can purchase an additional $5k.

5. #4 used to be the end of my list, but I ran across this interesting idea of parking your emergency fund in EE Savings Bonds.  My initial reaction was noooooooooo! because emergency funds should be liquid, easy to get to. After all, in an emergency, you need your cold, hard cash to get you out of a jam. But the more I thought about it, the more I like it.

True, you need liquid cash, but if you have built your emergency fund to the 6 months to a year of living expenses level, then at least part of it being in EE Savings Bonds could make sense. After all, hopefully you won’t have an emergency where you’ll need all of it, and if that’s the case, then you’d be hard pressed to find 3.6+% interest anywhere else.

And if you do have an emergency, well, then EE Savings Bonds are plenty liquid. As long as you’ve had them for over a year, just cash them in. You lose some interest, but, hey, it’s an emergency, right? 

This is where you get EE Savings Bonds.

Do you love EE Savings Bonds too? If so, why? And if not, then come commiserate on my EE Savings Bonds Hate post.

I Hate EE Savings Bonds

Most people hate EE Savings Bonds. Those people are right.

There are many finance blogs extolling the virtues of these things – they’re totally tax-free when used for college, perfect little baby birthday gifts, they’re guaranteed to double in 20 years (something like 3ish% interest) – but I hate them.

I hate them because most of those baby gift bonds are face value $50 or something stupid. Sorry, grandma, but $50 ain’t even buying a textbook.

I hate them because the only way EE Savings Bonds are useful is if you have a shit ton of them. Let’s face it – if grandma gave you a face value $10,000 bond as a baby gift…..and repeated that each year for 18 years, you’d have plenty of tax-free college funds.

But people don’t do that. They think the bonds are cute, and they feel good about “contributing to your education” instead of just giving you the fucking Lego set you wanted.

EE Savings Bonds are fabulous for the 1%. It’s an excellent way to stuff at least $10k a year into a pretty good tax savings vehicle at a guaranteed 3ish% (if holding onto them for 20 years). And, to be fair, if you’ve maxed out your 401k and your Roth IRA, it’s not a terrible idea to stash away a few grand a year for your retirement.

But again, people don’t use EE Savings Bonds that way. They’re too cute, they’re too low-denomination, they make people feel like they’re doing something good by buying a $50 one, when really what they need to do is stash away piles and piles of them. They let people off the hook.

What do you think? Love ’em or hate ’em?