What U.S. Savings Bonds Actually Return
U.S. Savings Bonds are a safe place to put money, but they are not a high-return investment. The interest rate changes every six months and depends on inflation. Right now, Series I bonds (which adjust for inflation) pay a combined rate that the U.S. Treasury sets twice a year — in May and November. Series EE bonds pay a fixed rate that never changes after you buy them.
The trade-off is straightforward: you get safety and a may provide return, but that return is usually lower than what you could earn in a high-yield savings account or a stock market fund. Savings bonds are backed by the U.S. government, so there is no risk of losing your principal. But you also cannot access your money for one year after purchase, and if you cash them out before five years, you lose the last three months of interest.
Key Takeaways
- Series I bonds earn interest that rises and falls with inflation, while Series EE bonds earn a fixed rate that stays the same for 30 years.
- You cannot withdraw money from a savings bond for at least one year, and withdrawing before five years costs you three months of interest.
- Current rates for both types are lower than many high-yield savings accounts, which offer similar safety with no withdrawal penalties.
- Savings bonds make sense if you want to lock money away for a long time and do not need access to it, or if you are saving for a child's education.
How Series I and Series EE Bonds Differ
Series I bonds are designed to protect you from inflation. The rate has two parts: a fixed rate (set when you buy) plus an inflation rate (adjusted every six months). If inflation rises, your rate rises with it. If inflation falls, your rate falls — but it never goes below the fixed portion. You can buy Series I bonds directly from TreasuryDirect.gov for $25 to $10,000 per person per calendar year.
Series EE bonds earn a fixed rate that never changes. The rate is set when you buy and stays the same for the entire 30-year life of the bond. The trade-off is that if inflation rises sharply, your fixed rate will not keep pace. Series EE bonds also cost $25 to $10,000 per person per year through TreasuryDirect.
Both types double in value after 20 years if held to maturity, though this is a mathematical feature of the rate, not a may provide. Both earn interest monthly, but you do not see the money until you cash them in.
When Savings Bonds Make Sense
Savings bonds work well if you have money you will not need for at least five years. The one-year lockup and three-month interest penalty mean you should only buy them if you are confident you will not touch the money. They are also useful if you want to reduce the temptation to spend — the penalty for early withdrawal makes the money psychologically harder to access.
Parents and grandparents sometimes buy Series EE bonds for children's education, since the interest is tax-free if the bonds are used to pay for college or university tuition. You must be the registered owner and the bonds must be in your name, not the child's. This strategy works only if you plan to hold the bonds until the child reaches college age.
Savings bonds also make sense as a small portion of a diversified portfolio — perhaps 5 to 10 percent of your savings — if you want may provide principal protection and do not mind a lower return. They are not a substitute for an emergency fund, which should be in a liquid account you can access when ready.
How Savings Bonds Compare to Other Safe Savings Options
| Product | Current Return | Access to Money | Safety |
|---|---|---|---|
| Series I Bonds | Varies with inflation, set every six months | One year lockup; three-month interest penalty before five years | Backed by U.S. government |
| Series EE Bonds | Fixed rate, never changes | One year lockup; three-month interest penalty before five years | Backed by U.S. government |
| High-Yield Savings Account | Varies by bank, typically 4% to 5% | Withdraw anytime, no penalty | FDIC insured up to $250,000 |
| Money Market Account | Varies by bank, typically 4% to 5% | Limited withdrawals per month, no penalty | FDIC insured up to $250,000 |
| Certificate of Deposit (CD) | Fixed rate, typically 4% to 5% | Locked for term (3 months to 5 years); early withdrawal penalty | FDIC insured up to $250,000 |
High-yield savings accounts currently offer rates similar to or higher than savings bonds, with the major advantage that you can withdraw your money anytime without penalty. Both are FDIC insured (savings accounts up to $250,000 per bank), so safety is equal. The main reason to choose a savings bond over a high-yield account is if you want to lock the money away and make it harder to spend.
Certificates of Deposit (CDs) work similarly to savings bonds — you lock money in for a set time and pay a penalty for early withdrawal — but CDs often pay higher rates and have shorter lockup periods. A one-year CD, for example, might pay more than a Series EE bond and still let you access your money after 12 months instead of being locked in for five years to avoid a penalty.
The Tax Picture for Savings Bonds
Interest earned on U.S. Savings Bonds is subject to federal income tax, but not state or local tax. You do not pay tax on the interest each year; instead, you pay it all at once when you cash in the bond. This can be an advantage if you are in a lower tax bracket when you redeem the bond than when you bought it.
Series EE bonds have a special tax break for education: if you use the proceeds to pay for college or university tuition and fees, the interest is completely tax-free. This only works if you meet specific conditions — you must be at least 24 years old when you buy the bond, the bond must be registered in your name (not your child's), and the money must go directly to the school. This feature makes Series EE bonds worth considering if you are saving for your own education or retraining.
The Downsides You Should Know
The biggest downside is that you cannot access your money for one year. If you buy a bond in January and need the money in June, you cannot get it. After one year, you can withdraw, but you lose three months of interest — so if you cash in after 18 months, you only receive 15 months of interest. This penalty makes savings bonds unsuitable for money you might need within five years.
The second downside is that rates are currently low compared to high-yield savings accounts. While Series I bonds protect you from inflation, the fixed portion of the rate is often less than 1 percent. If inflation stays low, you might earn less than you would in a savings account with no withdrawal restrictions.
Savings bonds also cannot be sold or transferred. Once you buy them, you own them until maturity or you cash them in. You cannot sell them to someone else if you need money urgently, and you cannot gift them to another person. This illiquidity is a real constraint if your circumstances change.
Frequently Asked Questions
Can I buy savings bonds for someone else as a gift?
No. You can only buy savings bonds in your own name through TreasuryDirect. You cannot purchase them as a gift or transfer them to another person after purchase. Some parents buy Series EE bonds in their own name for their children's education, but the parent remains the owner.
What happens if I need the money before five years?
You can withdraw after one year, but you lose the last three months of interest. So if you cash in after two years, you receive 21 months of interest instead of 24. Before one year, you cannot withdraw at all. This penalty is why savings bonds should only hold money you are certain you will not need.
Do I have to report savings bond interest on my taxes every year?
No. You can choose to report the interest each year, or you can wait and report it all when you cash in the bond. Most people wait until redemption. If you use a Series EE bond for education and meet the requirements, the interest is tax-free and you do not report it at all.
How do I buy savings bonds?
Go to TreasuryDirect.gov, create an account, and link your bank account. You can buy Series I or Series EE bonds in amounts from $25 to $10,000 per person per calendar year. The bonds are held electronically in your account, and you redeem them through the same website.
Are savings bonds a good investment right now?
That depends on your situation. If you have money you will not touch for five or more years and want may provide safety, they are reasonable. If you might need the money sooner, or if you want higher returns, a high-yield savings account or CD is usually better. Savings bonds are best as a small part of a larger savings plan, not as your main investment.