Dear Dr. Don,
In the past I have invested in Series I savings bonds. Recently, I have noted that Series EE bonds are favored. Last year I could only purchase $5,000 of Series I bonds. Has that changed, or perhaps it’s because the Series EE savings bond is the better investment?
— Joan Juncture

Dear Joan,
There are dollar limits for the Series I and the Series EE savings bonds. The new limits took effect Jan. 1, 2012. Savings bond purchases went mostly electronic after that date. The only way you can buy physical (paper) savings bonds  now is to purchase Series I savings bonds with the proceeds of your Internal Revenue Service tax refund and then you’re limited to a $5,000 purchase limit per calendar year of these paper Series I savings bonds. The Treasury makes a distinction between physical (paper) and electronic savings bond purchases, so you can purchase up to $5,000 in paper Series I savings bonds with your federal tax refund and $10,000 in electronic Series I savings bonds for a maximum total annual investment of $15,000 in Series I bonds. The Series EE savings bonds may now only be purchased electronically in a Treasury Direct account and have an annual purchase limit of $10,000. Both Series I and Series EE savings bonds are now purchased at face value, so a $100 purchase requires a $100 investment. The TreasuryDirect Web page, “Purchase Limits,” explains the limits in greater depth.

I don’t know where you got the tip that the Series EE savings bonds are currently favored as the better investment. It may be because the current fixed-rate component for Series I bonds purchased between May 1, 2013, and Oct. 31, 2013, is zero percent. Series I savings bonds get their interest earnings from two components: a fixed rate that is set at the time the bond is purchased, and a variable rate that is based on inflation as measured by the consumer price index, or CPI that changes twice a year. The inflation component is currently 1.76 percent. New inflation rates are announced every Nov. 1 and May 1. The Series I savings bond’s fixed rate component has been 0.00 percent since Nov. 1, 2010.

For a Series I saving bond purchased with a fixed component of zero percent to earn more than the Series EE savings bond, the inflation rate over time has to be higher than the fixed interest rate on the Series EE. That’s a pretty low bar if the bonds are held for more than one year, a savings bond’s minimum holding period, but less than 20 years. That’s because the current fixed rate on a newly purchased Series EE savings bond is 0.2 percent. Hold the Series EE for 20 years, however, and the government gives you a one-time payment to raise the yield to approximately 3.5 percent. The TreasuryDirect Web page, “EE/E Bonds Rates & Terms” explains the one-time payment, which is presented here.

At a minimum, the U.S. Treasury guarantees that an Series EE bond’s value will double after 20 years, its original maturity, and it will continue to earn the fixed rate unless a new rate or rate structure is announced. If a bond does not double in value as the result of applying the fixed rate for 20 years, the U.S. Treasury will make a one-time adjustment at original maturity to make up the difference. Series EE bonds earn interest for 30 years.

I’ll take the bet that inflation will average more than 0.2 percent over the next 19.5 years, but really hope that inflation doesn’t average more than 3.5 percent per year over the next 20 years. So your holding period can influence the type of savings bond you want to buy.

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