Savings bonds return less than stocks but more than cash, and they suit people who want may provide principal with no risk of loss

Savings bonds are issued by the U.S. Treasury and come in two types: Series EE bonds and Series I bonds. Both may provide you will not lose your initial investment, and both earn interest that compounds. The trade-off is that their returns are typically lower than stock market investments over long periods. Whether they are right for you depends on what you are saving for, how long you can leave the money untouched, and what other options you have.

Series EE bonds earn a fixed interest rate set by the Treasury when you buy them. Series I bonds earn a variable rate that adjusts every six months based on inflation. Neither type pays interest monthly or yearly — the interest compounds and is added to the bond's value. You do not receive a check; instead, the bond grows in your account.

Key Takeaways

  • Series EE bonds pay a fixed rate (currently around 2.5% annually, though this changes), while Series I bonds adjust every six months to track inflation.
  • You must hold either type for at least one year before cashing it in, and you lose the last three months of interest if you sell before five years.
  • Interest on savings bonds is not taxed by states or localities, and you can delay federal tax until you cash the bond or it matures.
  • Over 20 years, a diversified stock portfolio historically outpaces savings bonds, but bonds may provide your principal will not fall in value.
  • Savings bonds work best for money you will not need for at least five years and that you want protected from market swings.

How Series EE and Series I bonds differ in what they pay

Series EE bonds pay the same interest rate for the entire 30-year life of the bond. The Treasury announces the rate every six months (in May and November), and that rate applies to all EE bonds purchased during that period. As of the most recent announcement, the rate was approximately 2.5% annually, but this figure changes with each announcement. You can check the current rate on the Treasury Direct website before you buy.

Series I bonds are designed to protect you from inflation. They have two parts: a fixed rate (currently around 1.3%) that never changes, plus a variable inflation rate that resets every six months. The inflation portion is based on the Consumer Price Index, which the Treasury measures in May and November. When inflation is high, your I bond earns more. When inflation drops, your earnings slow but never go negative. This makes I bonds more attractive during periods of rising prices.

Both types earn interest by compounding — the interest gets added to the bond's value each month, and then you earn interest on that interest. You do not receive payments along the way. The bond straightforward grows until you cash it in.

Penalties and restrictions on when you can access your money

You cannot cash in a savings bond during the first year you own it. If you try to sell it before that year is up, the Treasury will reject the request. This is a hard rule for both EE and I bonds.

If you hold the bond for at least one year but less than five years, you can cash it in, but you will lose the last three months of interest. For example, if you hold a bond for two years and then sell it, you receive only 21 months of interest. This penalty exists to discourage early withdrawal. After five years, you can cash the bond without losing any interest.

Once a bond reaches 30 years old, it stops earning interest and you should cash it in. The Treasury will not automatically do this for you — you have to request it yourself through Treasury Direct or your bank.

Tax treatment and how it affects your actual return

Interest earned on savings bonds is not subject to state or local income tax, which is a real advantage over many other investments. Federal income tax is another story. You owe federal tax on the interest, but you have a choice about when to pay it.

Most people use the deferred tax method: you do not report or pay tax on the interest until you cash in the bond. At that point, you report the total interest earned as income on your federal tax return for that year. This can be useful if you cash the bond in a year when your income is lower, because the interest will be taxed at a lower rate.

Alternatively, you can choose to report the interest each year as it accrues, even though you have not received the money yet. This is less common but can make sense if you expect your tax bracket to be higher when you cash the bond. Once you choose a method, you must use it for all your savings bonds.

If you use the bond proceeds to pay for may have access to education expenses (tuition and fees at an accredited college or vocational school), you may be able to exclude the interest from your taxable income entirely. This benefit phases out at higher income levels, and the rules are specific, so check the Treasury's education savings bond page if this applies to you.

How savings bond returns compare to stocks and other investments

Over the past 20 years, a diversified portfolio of stocks has returned roughly 10% annually on average, though with significant year-to-year swings. A Series EE bond earning 2.5% annually will not come close to that. Even Series I bonds, which adjust for inflation, typically lag stock returns over long periods because they are designed to preserve purchasing power, not to build wealth.

The difference becomes stark over time. A $10,000 investment in a Series EE bond at 2.5% grows to roughly $16,400 after 20 years. The same $10,000 in a stock index fund averaging 10% annually grows to roughly $67,300 — more than four times as much. However, the stock fund could also have dropped 30% or 40% in a bad year, while the bond value never falls.

Savings bonds are not meant to compete with stocks for long-term wealth building. They are meant to preserve capital and earn a modest return with zero risk of loss. If you have decades until you need the money and can tolerate market swings, stocks are historically the better choice. If you have a shorter time horizon or cannot afford to see your balance drop, bonds make more sense.

Who should consider savings bonds and who should look elsewhere

Savings bonds work well for money you will not need for at least five years (to avoid the early withdrawal penalty) and that you want completely protected from market risk. They are popular for gifts to children, since the bonds can be held for decades and the deferred tax treatment can be advantageous if the child has little income when cashing them in.

They also suit people who are already maxing out their retirement accounts (401(k), IRA) and want another place to put money that offers tax advantages. The state tax exemption is a real benefit, especially if you live in a high-tax state.

Savings bonds are less suitable if you need the money within five years, because the three-month interest penalty makes them less competitive than high-yield savings accounts or short-term certificates of deposit. They are also not the right choice if you are trying to build wealth over decades — stocks and diversified portfolios have historically done that job much better.

The practical steps to buy savings bonds

You buy savings bonds directly from the U.S. Treasury through Treasury Direct, which is the government's online platform. You create an account, link a bank account, and purchase bonds electronically. There are no fees, no middleman, and no commissions. You can buy as little as $25 per bond (in $25 increments up to $10,000 per calendar year for EE bonds, and $5,000 per calendar year for I bonds).

You can also buy paper Series I bonds through your tax refund if you file a federal income tax return, though this option is being phased out. Most people now use Treasury Direct.

Once you own the bonds, they sit in your Treasury Direct account and earn interest automatically. You can check the current value anytime by logging in. When you are ready to cash them in (after at least one year), you request the redemption through the same account, and the money is deposited into your linked bank account within a few business days.

Frequently Asked Questions

Can I lose money on a savings bond?

No. The Treasury guarantees that you will get back at least what you paid for the bond, plus any interest earned. The principal never falls in value, regardless of what happens in the economy or financial markets.

What happens if I need the money before five years?

You can cash the bond after one year, but you will forfeit the last three months of interest. For example, if you hold it for two years, you get 21 months of interest instead of 24. After five years, you can cash it without any penalty.

Should I buy Series EE or Series I bonds?

Series I bonds are better during periods of high inflation because they adjust every six months. Series EE bonds lock in a fixed rate, which is better if you think inflation will fall. Check the current rates on Treasury Direct before you decide, since the rates change every six months.

Can I buy savings bonds for someone else?

Yes. You can buy bonds in another person's name as a gift through Treasury Direct. The recipient owns the bond and controls it once they reach the age of majority in their state, typically 18 or 21.

Do I have to report the interest every year on my taxes?

Not unless you choose to. Most people use the deferred method and report all the interest when they cash the bond. You can switch to reporting interest annually, but once you do, you must stick with that method for all your savings bonds.