EE bonds and I bonds are relatively similar with only a few differences. Both are government-backed savings bonds that provide predictable, guaranteed earnings when purchased. They are considered some of the safest investments on the market as a result, and they both offer tax benefits.

Similarities between EE Bonds and I Bonds

  • Both bonds mature in 1 to 30 years.
  • A penalty equal to the last 3 months of interest is applied if you cash either bond in before five years.
  • Interest is only collected when both forms of bonds are redeemed.
  • Both offer freedom from local and state taxes.
  • If you use either bond interest to repay the cost of higher education, then you do not owe taxes on the earnings.

Differences between EE Bonds and I Bonds

  • I Bonds, meaning "inflation protected" bonds, are measured against the national rate of inflation. Over time, the bond pays a consistent base interest rate. There is a second interest rate on the bond that compensates for the rate of inflation. This means the bonds can never return lower amounts than the rate of inflation, meaning you cannot actually lose money on the investment.
  • EE Bonds have a single interest rate, and they are not adjusted for inflation. The single interest rate, however, tends to be higher than with I Bonds. You cannot lose your initial investment, and you cannot lose the interest you have earned. Unfortunately, if inflation is very high, there is no guarantee you will not lose earnings over time. Because you are not protected against inflation, even re-earning your initial rate may cause you to feel you have netted a loss in the long run.

When EE Bonds are Best

EE Bonds are best if you predict a relatively low inflation period. This occurs when the economy is stable, which it is most times in history. For the most part, you will earn more on an EE bond than you will on an I bond because of the higher interest rate offered. This rate is set at the current market level. So, if the market is stable to strong, the interest rate will continue to go up and you will have higher earnings. EE bonds do present slightly more risk, and they are therefore favored by higher risk investors. On the whole, though, all federal guaranteed bonds are relatively stable and low risk.

When I Bonds are Best

I Bonds are best if you predict a relatively volatile market with periods of high inflation. This typically occurs only following a recession or downturn in the market. I bond interest rates are not based on the market; they are permanently fixed. The inflation protection only means you will earn a certain amount above your existing rate in order to protect against the risk of inflation. As a result, you will not see the benefits of a very strong bond market. I bonds are incredibly safe investments. They go beyond the average safety offered by government bonds in their additional level of inflation protection. They are a good option for something like a college savings fund.

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