If you use EE Bonds, what did drive your decision

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RandomPointer
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If you use EE Bonds, what did drive your decision

Post by RandomPointer » Sat Dec 09, 2017 2:37 pm

I have seen plenty of discussions about EE bonds. I still cannot make my mind up whether I should get EE bonds or not. The guaranteed return is really good, but 20 years is a long time to invest. I am planning to start building an income ladder for retirement.

Two only that hold me back is the 20 years holding period. I have more than a year worth of expenses in my taxable, so I can handle having money tied in EE bonds (to a certain amount).

Having a guaranteed income ladder is desirable, but I have it baked in my mind to get bonds with medium maturity.

So, if you decided to use EE bonds, what did drive your decision? What was the factor(s) that made you do it?

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Re: If you use EE Bonds, what did drive your decision

Post by Grt2bOutdoors » Sat Dec 09, 2017 2:54 pm

I've been buying them, my thought is to use it as part of a guaranteed nominal ladder to permit me to take Social Security at age 70. Assuming nothing is changed down the road, I'll move from a nominal ladder to an inflation adjusted one for the remainder of my stay. I would not advise anyone to tie up all or a significant part of their assets in EE bonds as that would leave one overly exposed to the ravages of inflation. While recent inflation has been tame, a review of past history shows there have been times where inflation has been significantly higher (double digits) and history has a funny way of repeating itself from time to time. :annoyed
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sport
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Re: If you use EE Bonds, what did drive your decision

Post by sport » Sat Dec 09, 2017 3:09 pm

Inflation is one risk. Another related risk is rising interest rates. The 3.5% rate seems attractive now. However, how would you feel if rates rise to 5% or 6% after 10 or 12 years? You would have the choice of cashing out at 0.1%, or staying another 8 to 10 years to get the 3.5% which would be way below what could be obtained elsewhere. I still have an old bank statement that shows CD accounts paying 14.3% (that is not a typo). No one knows what interest rates will be over the next 20 years.

DorchesterMa
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Re: If you use EE Bonds, what did drive your decision

Post by DorchesterMa » Sat Dec 09, 2017 3:17 pm

I invested in Vanguard Total Bond Market Index Fund Admiral Shares in May 2016. The account is still showing a long term capital loss of $3,348.86.
Call me stupid but I don't like having losses when it comes to bonds. My wife and I started a EE Bond ladder in 2016 and we listed our 2 adult children as beneficiaries on the EE Bonds. I like the idea of a guaranteed 3.56% return, tax deferred for the 20 years that I will hold each bond, and no state income tax. I like the fact that this will produce a nice guaranteed income stream for my children. Hopefully the Vanguard S&P 500 Index Fund will produce the bulk of our legacy and the EE Bonds will be safe, guaranteed, with no losses for them. We are getting ready to purchase our 2018 allotment of EE Bonds.
Good luck!

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Re: If you use EE Bonds, what did drive your decision

Post by mhop » Sat Dec 09, 2017 3:51 pm

I’d be grateful if my worst performing portion of my bond allocation were returning 3.53% compared to where rates are today. If that day comes, and you’re still capable of deploying future earnings and running tabulations in a spreadsheet, then invest elsewhere for that years allocation and consider getting out of this 2017 EE if appropriate. I do think it’s that simple.

It’s a good investment looking at rates in 2017. I have ibonds for inflation protection as well to hedge against large, unexpected inflation.

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Re: If you use EE Bonds, what did drive your decision

Post by aristotelian » Sat Dec 09, 2017 6:25 pm

I am thinking about taking the plunge. Haven't done it yet, but I would like to have my retirement accounts closer to 100% stock and I already have I Bonds and as much muni bonds as I am willing to risk. I don't mind having a small amount of my bond portfolio untouchable for 20 years given the return and tax advantages.

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Re: If you use EE Bonds, what did drive your decision

Post by obafgkm » Sat Dec 09, 2017 6:32 pm

DorchesterMa wrote:
Sat Dec 09, 2017 3:17 pm
I invested in Vanguard Total Bond Market Index Fund Admiral Shares in May 2016. The account is still showing a long term capital loss of $3,348.86.
Sure, that's a loss, but I (for one) need context. How much did you invest in May 2016? $10,000 or $100,000? There's a big difference.

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Re: If you use EE Bonds, what did drive your decision

Post by Lastrun » Sat Dec 09, 2017 6:46 pm

Grt2bOutdoors wrote:
Sat Dec 09, 2017 2:54 pm
I've been buying them, my thought is to use it as part of a guaranteed nominal ladder to permit me to take Social Security at age 70. . . . I would not advise anyone to tie up all or a significant part of their assets in EE bonds as that would leave one overly exposed to the ravages of inflation.
mhop wrote:
Sat Dec 09, 2017 3:51 pm
I’d be grateful if my worst performing portion of my bond allocation were returning 3.53% compared to where rates are today.
These statements above are a good summary of the reasons I and DW have plowed $20K into EE bonds each year. But the important thing to realize is that I consider my EE Bond contributions my last contributions after maxing out everything else possible including 401Ks, back door Roths, I bonds, and a healthy emergency fund.

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Re: If you use EE Bonds, what did drive your decision

Post by Grt2bOutdoors » Sat Dec 09, 2017 6:53 pm

obafgkm wrote:
Sat Dec 09, 2017 6:32 pm
DorchesterMa wrote:
Sat Dec 09, 2017 3:17 pm
I invested in Vanguard Total Bond Market Index Fund Admiral Shares in May 2016. The account is still showing a long term capital loss of $3,348.86.
Sure, that's a loss, but I (for one) need context. How much did you invest in May 2016? $10,000 or $100,000? There's a big difference.
Better yet, with just a few short weeks left in the year, I would consider exchanging the Total Bond Market position and purchasing Intermediate investment grade bond or Intermediate Treasury fund, to capture the loss, swapping back into Total Bond Market when time/additional losses in new fund permit.
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supernova
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Re: If you use EE Bonds, what did drive your decision

Post by supernova » Sat Dec 09, 2017 7:41 pm

sport wrote:
Sat Dec 09, 2017 3:09 pm
Inflation is one risk. Another related risk is rising interest rates. The 3.5% rate seems attractive now. However, how would you feel if rates rise to 5% or 6% after 10 or 12 years? You would have the choice of cashing out at 0.1%, or staying another 8 to 10 years to get the 3.5% which would be way below what could be obtained elsewhere. I still have an old bank statement that shows CD accounts paying 14.3% (that is not a typo). No one knows what interest rates will be over the next 20 years.
In 10 years, since the EE bond doubles in 20 years, the effective EE bond rate would be 7.18% (since it would double in 10 more years).

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Re: If you use EE Bonds, what did drive your decision

Post by Thesaints » Sat Dec 09, 2017 7:45 pm

Well, then at the beginning of year 19 they would have a rate close to 100%, but I’m not sure this kind of analysis is meaningful for non-marketable bonds.

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Re: If you use EE Bonds, what did drive your decision

Post by Leif » Sat Dec 09, 2017 7:48 pm

At the time they allowed the use of credit cards to purchase. The cash back bonus, and the 17 year doubling, was enough for me.
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letsgobobby
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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sat Dec 09, 2017 7:49 pm

A long period of low or falling interest rates is a possibility. EE bonds are a hedge against that possibility. I have others, such as treasuries, but they yield less. EEs are suitable for a portion of my fixed income, but because of the limits on liquidity they should almost never be one’s sole fixed income investment.

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Re: If you use EE Bonds, what did drive your decision

Post by Buster Smith » Sat Dec 09, 2017 7:51 pm

A little different story. 30+ years ago I started buying EE bonds through payroll deductions with the company. Weekly $25, $50, etc. The idea was to use this money for my kids college. I never considered holding until full maturity. When I was buying the bonds all the media financial folks were saying savings bonds were a terrible investment. I looked at it as a easy/forced savings for a specific purpose. (after I started my program the proceeds from bonds could be used for education untaxed)

Fortunately, all the children went to college and graduated with no debt and I didn't need to use any of the bonds.

Each month as the bonds mature (stop paying interest at 30 years) I flip them over to I bonds. I take a tax hit each year on the earned interest, but our great grandchildren may need some help paying for college.

The bonds that are maturing for the next 7-8 years have all earned 4%. The later bonds drop down to the 1.68.(there were some changes from the guaranteed 4% to a formula with inflation as a factor)

Invested ~$60,000 current value ~$179,000 and still earning interest....

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Re: If you use EE Bonds, what did drive your decision

Post by Thesaints » Sat Dec 09, 2017 7:55 pm

letsgobobby wrote:
Sat Dec 09, 2017 7:49 pm
A long period of low or falling interest rates is a possibility. EE bonds are a hedge against that possibility. I have others, such as treasuries, but they yield less. EEs are suitable for a portion of my fixed income, but because of the limits on liquidity they should almost never be one’s sole fixed income investment.
Consider also this point of view. Safe goverment short term funds pay around 2% currently. Every year you keep EE you lose that much.

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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sat Dec 09, 2017 8:08 pm

Thesaints wrote:
Sat Dec 09, 2017 7:55 pm
letsgobobby wrote:
Sat Dec 09, 2017 7:49 pm
A long period of low or falling interest rates is a possibility. EE bonds are a hedge against that possibility. I have others, such as treasuries, but they yield less. EEs are suitable for a portion of my fixed income, but because of the limits on liquidity they should almost never be one’s sole fixed income investment.
Consider also this point of view. Safe goverment short term funds pay around 2% currently. Every year you keep EE you lose that much.
why?

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Re: If you use EE Bonds, what did drive your decision

Post by Thesaints » Sat Dec 09, 2017 8:11 pm

If rates climb along the way you might have to decide whether to close the position having missed 2% return for every year you held it, or carry it to the 20 years mark and make 3.5% instead of 2% for part of the period and higher rates afterwards.
Clearly, it all depends on if and when rates climb and by how much.

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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sat Dec 09, 2017 9:23 pm

If rates climb significantly then EE bonds will have been a bad investment, just like any long term bond. They're for a scenario of flat rates for many years.

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Re: If you use EE Bonds, what did drive your decision

Post by Thesaints » Sat Dec 09, 2017 9:27 pm

letsgobobby wrote:
Sat Dec 09, 2017 9:23 pm
If rates climb significantly then EE bonds will have been a bad investment, just like any long term bond. They're for a scenario of flat rates for many years.
And that’s the part I’m not sure is clear to everybody.

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Re: If you use EE Bonds, what did drive your decision

Post by Mel Lindauer » Sat Dec 09, 2017 9:51 pm

Here's one good use for EE Bonds. This Forbes article I did some time ago explains how to use EE Bonds to build an income stream (annuity) in retirement.

https://www.forbes.com/sites/theboglehe ... 6334537ba3
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Re: If you use EE Bonds, what did drive your decision

Post by Grt2bOutdoors » Sat Dec 09, 2017 9:53 pm

letsgobobby wrote:
Sat Dec 09, 2017 8:08 pm
Thesaints wrote:
Sat Dec 09, 2017 7:55 pm
letsgobobby wrote:
Sat Dec 09, 2017 7:49 pm
A long period of low or falling interest rates is a possibility. EE bonds are a hedge against that possibility. I have others, such as treasuries, but they yield less. EEs are suitable for a portion of my fixed income, but because of the limits on liquidity they should almost never be one’s sole fixed income investment.
Consider also this point of view. Safe goverment short term funds pay around 2% currently. Every year you keep EE you lose that much.
why?
You lose if you sell before year 20. Otherwise, you breakeven after inflation if it remains below 3%.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

letsgobobby
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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sat Dec 09, 2017 11:21 pm

Grt2bOutdoors wrote:
Sat Dec 09, 2017 9:53 pm
letsgobobby wrote:
Sat Dec 09, 2017 8:08 pm
Thesaints wrote:
Sat Dec 09, 2017 7:55 pm
letsgobobby wrote:
Sat Dec 09, 2017 7:49 pm
A long period of low or falling interest rates is a possibility. EE bonds are a hedge against that possibility. I have others, such as treasuries, but they yield less. EEs are suitable for a portion of my fixed income, but because of the limits on liquidity they should almost never be one’s sole fixed income investment.
Consider also this point of view. Safe goverment short term funds pay around 2% currently. Every year you keep EE you lose that much.
why?
You lose if you sell before year 20. Otherwise, you breakeven after inflation if it remains below 3%.
we already know EEs are no good if not held twenty years.

Thesaints
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Re: If you use EE Bonds, what did drive your decision

Post by Thesaints » Sat Dec 09, 2017 11:56 pm

Which is riskier: an EE just issued, or a 20 year treasury yielding 3.5% ?

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Re: If you use EE Bonds, what did drive your decision

Post by anoop » Sun Dec 10, 2017 2:33 am

I started buying only last year and this year because the rate offered is higher than even the 30 year T bond.

I buy both I and E. If I had to buy one, I'd buy I. But buying both is a nice hedge. If inflation takes off, the I will do well. If there is deflation or very low inflation, the E will do well. Additionally, you never lose principal with the E, but with a traditional bond, if interest rates rise, you will lose principal unless held to maturity.

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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sun Dec 10, 2017 10:07 am

I no longer buy I, since the real return net of taxes is likely to be negative.

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Re: If you use EE Bonds, what did drive your decision

Post by anoop » Sun Dec 10, 2017 12:03 pm

letsgobobby wrote:
Sun Dec 10, 2017 10:07 am
I no longer buy I, since the real return net of taxes is likely to be negative.
How so? The interest paid is 2x the inflation rate.
https://tipswatch.com/tracking-inflation-and-i-bonds/

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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sun Dec 10, 2017 2:02 pm

I'm taxed on the fixed as well as the inflation component.

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Re: If you use EE Bonds, what did drive your decision

Post by anoop » Sun Dec 10, 2017 2:53 pm

letsgobobby wrote:
Sun Dec 10, 2017 2:02 pm
I'm taxed on the fixed as well as the inflation component.
That's correct, but you're getting at least 2x the inflation (the fixed part would be in addition to that). It never goes down during deflation. There are no state taxes.

How does it end up losing to inflation?

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Re: If you use EE Bonds, what did drive your decision

Post by mhop » Sun Dec 10, 2017 3:09 pm

letsgobobby wrote:
Sat Dec 09, 2017 9:23 pm
If rates climb significantly then EE bonds will have been a bad investment, just like any long term bond. They're for a scenario of flat rates for many years.
If rates rise significantly then other investments such as bond funds will prove to be worse as principal disappears. People often overlook this when pointing to the negatives of EEs. I’d also expect EE rates to rise for issues in that year and possibly doubling time to decrease.

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Re: If you use EE Bonds, what did drive your decision

Post by aristotelian » Sun Dec 10, 2017 3:19 pm

letsgobobby wrote:
Sun Dec 10, 2017 10:07 am
I no longer buy I, since the real return net of taxes is likely to be negative.
I don't get this argument. Do you also not invest in savings accounts or CD's? What if it provides the highest real return relative to the risk?

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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sun Dec 10, 2017 4:36 pm

wow, was not intended to be a controversial statement.

anoop, I don’t understand what you’re saying. why do you think I bonds pay double the rate of inflation?

mhop, I agree. i do buy the max EE bonds every year. they are not risk free. because they must be held twenty years i demand a return premium. i dont know how they would compare to short term bonds. probably depends on the scenario (how much and how fast rates change). i own short and intermediate term bonds, too.

aristotelian, no. I do not invest in CDs or savings accounts.

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Re: If you use EE Bonds, what did drive your decision

Post by anoop » Sun Dec 10, 2017 4:48 pm

letsgobobby wrote:
Sun Dec 10, 2017 4:36 pm
anoop, I don’t understand what you’re saying. why do you think I bonds pay double the rate of inflation?
https://tipswatch.com/tracking-inflation-and-i-bonds/
Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]
If you missed that, you are making a mistake by assuming you lose out to inflation after tax. Unless you pay > 50% federal tax (how?).

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Re: If you use EE Bonds, what did drive your decision

Post by letsgobobby » Sun Dec 10, 2017 5:13 pm

anoop wrote:
Sun Dec 10, 2017 4:48 pm
letsgobobby wrote:
Sun Dec 10, 2017 4:36 pm
anoop, I don’t understand what you’re saying. why do you think I bonds pay double the rate of inflation?
https://tipswatch.com/tracking-inflation-and-i-bonds/
Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]
If you missed that, you are making a mistake by assuming you lose out to inflation after tax. Unless you pay > 50% federal tax (how?).
Sorry, I believe it is your mistake. Reread the info you linked to. The inflation rate in the equation is the six month inflation rate. That is why it is doubled. The composite rate is determined for a six month period but is calculated on an annualized basis. And why net of taxes, I bonds lose to any significant amount of inflation.

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Re: If you use EE Bonds, what did drive your decision

Post by anoop » Sun Dec 10, 2017 5:27 pm

letsgobobby wrote:
Sun Dec 10, 2017 5:13 pm
Sorry, I believe it is your mistake. Reread the info you linked to. The inflation rate in the equation is the six month inflation rate. That is why it is doubled. The composite rate is determined for a six month period but is calculated on an annualized basis. And why net of taxes, I bonds lose to any significant amount of inflation.
OK, I may need to take a closer look.

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Re: If you use EE Bonds, what did drive your decision

Post by Noobvestor » Sun Dec 10, 2017 9:47 pm

A few considerations for me personally:

1) I have a lot of money in taxable accounts, so I like the tax deferral

2) I have series I bonds and like the balance of having some nominal bonds

3) I will likely end up in a high-tax state (MN or CA) so the state tax exemption is a bonus

4) Doubling rate is higher than comparable-duration Treasuries (heck, they're better than 30-years right now)

5) They're a small enough portion of my portfolio that the (effective) lack of liquidity (while waiting for doubling) doesn't bother me

6) My bonds are mostly intermediate-term and I don't mind stretching that slightly toward a longer duration

So far, if you count their growth toward doubling, my EE bonds have done better over the last 5 years than other bond holdings (TIPS, I bonds, munis, etc...). Probably too soon to count those chickens, but rates would really have to pick up a lot for other bonds to catch up.
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Re: If you use EE Bonds, what did drive your decision

Post by RandomPointer » Tue Dec 12, 2017 1:57 am

I appreciate all the input. Thank you. :)

There has been many threads that I reviewed, and I am well aware about the interest rate risk. It was the liquidity problem that bothered me. There are plenty of information, but I found it beneficial to find the reasons why you choose EE bonds.

Reading this response, I think I will follow what LastRun and NoobInvestor do. I have a good enough money in taxable, and maxed out retirement accounts. Beyond that, I will utilize IBonds and EE Bonds. Those will be very small portion of my overall portfolio, so EE bonds lack of liquidity should not be a problem. I like the idea of building a bond ladder until I claim SS at 70.

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Re: If you use EE Bonds, what did drive your decision

Post by anoop » Tue Dec 12, 2017 2:03 am

anoop wrote:
Sun Dec 10, 2017 5:27 pm
letsgobobby wrote:
Sun Dec 10, 2017 5:13 pm
Sorry, I believe it is your mistake. Reread the info you linked to. The inflation rate in the equation is the six month inflation rate. That is why it is doubled. The composite rate is determined for a six month period but is calculated on an annualized basis. And why net of taxes, I bonds lose to any significant amount of inflation.
OK, I may need to take a closer look.
You are correct in that the returns approximate 1x inflation. Thanks for pointing that out.

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Re: If you use EE Bonds, what did drive your decision

Post by jmk » Mon Jan 01, 2018 6:45 am

EE can function nicelyfor liability matching. However their lack of liquidity has two big impacts: not only do I need to wait 20 years but I’ll have no wiggle room at that point in not withdrawing, affecting taxes. I bought EE to be used for income during that period before SS kicked in, but stopped getting them when I reached age 50, 20 years from SS.

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Re: If you use EE Bonds, what did drive your decision

Post by Mel Lindauer » Mon Jan 01, 2018 7:38 pm

jmk wrote:
Mon Jan 01, 2018 6:45 am
EE can function nicelyfor liability matching. However their lack of liquidity has two big impacts: not only do I need to wait 20 years but I’ll have no wiggle room at that point in not withdrawing, affecting taxes. I bought EE to be used for income during that period before SS kicked in, but stopped getting them when I reached age 50, 20 years from SS.
Actually, there is wiggle room with the EE Bonds at the 20 year mark since they don't have to be redeemed at that point. The 20-year mark is called the initial maturity.

There's an extended maturity period of up to 10 additional years, since EE Bonds pay interest for up to 30 years.

https://www.savingsbonds.gov/indiv/rese ... _bonds.htm
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Re: If you use EE Bonds, what did drive your decision

Post by RetiredCSProf » Tue Jan 02, 2018 12:15 am

Buster Smith wrote:
Sat Dec 09, 2017 7:51 pm
A little different story. 30+ years ago I started buying EE bonds through payroll deductions with the company. Weekly $25, $50, etc. The idea was to use this money for my kids college. I never considered holding until full maturity. When I was buying the bonds all the media financial folks were saying savings bonds were a terrible investment. I looked at it as a easy/forced savings for a specific purpose. (after I started my program the proceeds from bonds could be used for education untaxed)

Fortunately, all the children went to college and graduated with no debt and I didn't need to use any of the bonds.

Each month as the bonds mature (stop paying interest at 30 years) I flip them over to I bonds. I take a tax hit each year on the earned interest, but our great grandchildren may need some help paying for college.
I purchased EE bonds through payroll deductions for many years as well while working for a quasi-government company. I had planned to redeem the bonds to use toward my son's college education, but my income exceeds the limit for the federal tax exclusion ($93,150 or more for single or head of household in 2017). The bonds will start to reach their 30-year maturity soon -- not sure if I will redeem them or convert to I bonds.

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Re: If you use EE Bonds, what did drive your decision

Post by anoop » Tue Jan 02, 2018 1:13 am

RetiredCSProf wrote:
Tue Jan 02, 2018 12:15 am
not sure if I will redeem them or convert to I bonds.
Is there some special "conversion" that is available? I thought after 30 years you have to redeem and pay tax (esp if electronic, not sure if one can defer taxes by holding on to paper at 0%).

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Re: If you use EE Bonds, what did drive your decision

Post by RetiredCSProf » Tue Jan 02, 2018 1:57 am

anoop wrote:
Tue Jan 02, 2018 1:13 am
RetiredCSProf wrote:
Tue Jan 02, 2018 12:15 am
not sure if I will redeem them or convert to I bonds.
Is there some special "conversion" that is available? I thought after 30 years you have to redeem and pay tax (esp if electronic, not sure if one can defer taxes by holding on to paper at 0%).
No, there's no longer any way to defer the tax on my paper EE bonds by rolling over to HH bonds. That option sailed years ago. I meant that I can redeem the EE bonds, pay the tax, and spend the cash (on whatever) or re-invest in I bonds.

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