US Savings Bonds are low-risk but offer returns that often lag inflation

US Savings Bonds are debt instruments issued by the US Treasury. You lend money to the federal government, and in return you receive a fixed or variable interest rate. The two types available to individual buyers are Series EE bonds (fixed rate) and Series I bonds (variable rate tied to inflation). Neither will make you wealthy, but both protect your principal and offer tax advantages that matter in specific situations.

The trade-off is straightforward: safety and simplicity in exchange for returns that rarely beat the stock market over long periods. Series EE bonds currently pay a fixed rate set by the Treasury every six months — the current rate is 2.10% annual (rates change May 1 and November 1 each year). Series I bonds pay a combined rate of a fixed portion plus an inflation component that adjusts every six months. The current combined rate is 5.27% annual, but that rate resets in May, and the inflation portion will likely fall as inflation cools.

You cannot sell a bond before five years without losing the last three months of interest. If you sell between five and thirty years, you lose the last three months of interest but keep the rest. After thirty years, bonds stop earning interest and you should cash them in.

Key Takeaways

  • Series EE bonds pay a fixed rate (currently 2.10% annually) that never changes, while Series I bonds pay a variable rate (currently 5.27% annually) that resets every six months based on inflation.
  • You must hold any bond for at least five years to avoid losing the last three months of interest, and you cannot access your money quickly if you need it.
  • Interest on savings bonds is exempt from state and local income tax, and federal tax can be deferred until you cash the bond or it matures, which matters most for high earners in high-tax states.
  • Series I bonds protect your purchasing power during inflation, but Series EE bonds lose value in real terms if inflation exceeds 2.10% annually.
  • You can buy up to $10,000 per person per calendar year in electronic bonds through TreasuryDirect, with an additional $5,000 in paper bonds if you use your tax refund.

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

Series EE bonds lock in a rate when you buy them. That rate stays the same for the entire thirty-year life of the bond. You know exactly what you will earn before you hand over money. The current rate is 2.10% annual, compounded semiannually. If you buy a $1,000 EE bond today, you will earn $21 in the first year (before compounding), and that rate will not change even if Treasury rates rise or fall.

Series I bonds work differently. They combine two rates: a fixed rate (currently 0.40% annual) that never changes, plus an inflation rate (currently 4.87% annual) that adjusts every six months based on the Consumer Price Index. The inflation portion can fall to zero if deflation occurs, but it cannot go negative — your rate will never drop below the fixed portion alone. In May 2024, the combined rate will reset based on new inflation data, and many buyers expect the rate to fall because inflation has cooled since the current rate was set.

This difference matters most when inflation is high. Series I bonds protect you if prices rise faster than expected. Series EE bonds do not — if inflation hits 4% and your EE bond pays 2.10%, you are losing purchasing power even though you are earning interest.

Tax treatment and when the tax advantage matters

Interest on both types of bonds is exempt from state and local income tax. This is automatic — you do not file anything special. For someone in a high-tax state like California or New York, this alone can add 5% to 10% to your after-tax return compared to a taxable bond or CD paying the same rate.

Federal income tax on the interest can be deferred until you cash the bond or it reaches final maturity (thirty years). You do not have to report the interest each year as you earn it. This deferral is valuable if you are in a lower tax bracket when you cash the bond than when you bought it — for example, if you buy bonds while working and cash them in retirement. It is less valuable if your tax bracket stays the same or rises.

There is one exception: if you use Series I or EE bond proceeds to pay for may have access to education expenses (tuition and fees at an accredited school), the interest may be exempt from federal tax entirely. You must meet income limits, and the bond must have been issued to someone age 24 or older. This path requires careful planning and documentation, so review IRS Publication 17 or speak with a tax professional before counting on this benefit.

Liquidity limits and the five-year lock-in

You cannot access your money from a savings bond without a penalty until five years have passed. If you cash a bond before five years, you lose the last three months of interest. This is not a small cost — it can erase a year or more of earnings on a low-rate bond.

After five years, you can cash the bond anytime, but you still lose the last three months of interest. If you need the money in an emergency, you will take a hit. This makes savings bonds unsuitable for emergency funds or money you might need within five years.

You buy bonds through TreasuryDirect, a website run by the US Treasury. You cannot buy them through a bank or brokerage. You also cannot sell a bond to another person — you can only cash it back to the Treasury. This means there is no secondary market and no way to exit early without the penalty.

Purchase limits and how to buy

You can buy up to $10,000 per person per calendar year in electronic Series EE and Series I bonds combined through TreasuryDirect. If you have a tax refund, you can buy an additional $5,000 in paper bonds by requesting them on your tax return (Form 8888). Married couples can each buy $10,000 in electronic bonds, so a household can purchase $20,000 per year, plus up to $10,000 in paper bonds if both spouses have refunds.

To buy electronic bonds, you create an account on TreasuryDirect.gov, link a bank account, and purchase bonds directly. The process takes about ten minutes. Bonds are issued on the first business day of the month following your purchase. Paper bonds take longer — they arrive by mail and are issued on the date you request them on your tax return.

You must be at least eighteen years old and have a valid Social Security number. You can buy bonds for a child under eighteen, but you must be the parent or legal guardian and the bond is registered in your name with the child as beneficiary.

Comparing savings bonds to other low-risk options

High-yield savings accounts currently pay 4.5% to 5.35% annual interest, depending on the bank. This rate is higher than Series EE bonds (2.10%) and competitive with Series I bonds (5.27%), but the rate can change monthly. You also pay federal income tax on the interest, unlike savings bonds. However, you can withdraw money anytime without penalty, which savings bonds do not allow.

Certificates of deposit (CDs) from banks typically pay 4.5% to 5.5% annual for one-year terms, and rates vary by bank and term length. Like high-yield savings, CDs are fully taxable and allow early withdrawal (though with a penalty). The advantage is simplicity and FDIC insurance up to $250,000 per bank.

Treasury bills, notes, and bonds are also issued by the US Treasury but trade on a secondary market and mature in different timeframes. A one-year Treasury bill currently yields around 5.3%, and you can sell it before maturity if you need the money. The trade-off is that the price fluctuates with interest rates — if rates rise, the value of your bond falls.

For someone who wants to lock in a rate and does not need the money for five years, Series EE bonds offer simplicity and tax efficiency. For someone concerned about inflation, Series I bonds protect purchasing power. For someone who might need the money sooner, a high-yield savings account or CD is more flexible.

Real returns and inflation risk

A real return is what you earn after inflation is subtracted. If inflation is 3% and your bond pays 2.10%, your real return is negative — you are losing purchasing power. Series EE bonds carry this risk because the rate is fixed and inflation is unpredictable.

Series I bonds are designed to offset this risk. The inflation component adjusts every six months, so your rate should stay ahead of inflation. However, the rate resets based on inflation from the past six months, not future inflation. If inflation spikes unexpectedly after your rate is set, you will fall behind until the next reset.

Over the past twenty years, inflation has averaged around 2.5% annually, though it has varied widely. If you bought a Series EE bond in 2021 at 0.10% annual, you lost significant purchasing power as inflation hit 8% in 2022. If you bought a Series I bond in 2022 at 9.62% annual, you protected yourself. This is why the choice between EE and I bonds depends partly on your inflation outlook.

Frequently Asked Questions

Can I lose money on a US Savings Bond?

No, the principal is may provide by the US government. However, you can lose interest if you cash the bond before five years (you forfeit the last three months of interest). You can also lose purchasing power if inflation exceeds your bond's interest rate, especially with Series EE bonds.

What happens if I need the money before five years?

You can cash the bond anytime, but you will lose the last three months of interest as a penalty. For example, if you cash a bond after three years, you receive the principal plus interest for only 2 years and 9 months. This penalty makes savings bonds unsuitable for emergency funds.

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

No. You can defer federal income tax until you cash the bond or it reaches thirty-year maturity. State and local income tax is never owed on the interest. If you use the proceeds for may have access to education expenses, the interest may be exempt from federal tax entirely, subject to income limits.

Which type should I buy, EE or I?

Series I bonds protect your purchasing power during inflation and currently pay a higher rate (5.27% vs. 2.10%). Series EE bonds offer simplicity and a locked-in rate if you believe inflation will stay low. If you are unsure about inflation, Series I bonds are the safer choice for long-term money.

Can I buy savings bonds through my bank or brokerage?

No. You must buy electronic bonds directly through TreasuryDirect.gov. Paper bonds can only be purchased through your tax return. Banks and brokerages do not sell new savings bonds, though they may sell older bonds on the secondary market at a markup.