What a savings bond actually is

A savings bond is a loan you make to the U.S. government. You give the government money now, and they promise to pay you back that money plus interest after a set period of time. The government uses the money you lend them to fund operations, and in return, they pay you for letting them use it.

Think of it like this: if you lend a friend $100 and they agree to pay you back $110 in a year, you've made a bond. The $100 is your principal, the $10 is your interest, and the one year is your term. Savings bonds work the same way, except the borrower is the U.S. Treasury instead of a friend.

The Treasury issues two main types of savings bonds that individuals can buy: Series EE bonds and Series I bonds. Each type works differently and pays interest in different ways, which we'll cover in the sections below.

Key Takeaways

  • A savings bond is a loan to the U.S. government that pays you back with interest after a set holding period.
  • Series EE bonds are sold at half their face value and double in value over 20 years, while Series I bonds adjust their interest rate every six months based on inflation.
  • You can buy savings bonds through TreasuryDirect.gov, the official government website, for as little as $25.
  • You must hold a savings bond for at least one year before you can cash it in, and cashing it in before five years means you lose the last three months of interest.
  • Interest on savings bonds is not taxed by your state or local government, and you can delay federal taxes until you cash the bond or it reaches final maturity.

How Series EE bonds work

A Series EE bond is sold at half its face value. If you buy a $100 bond, you pay $50. The bond then earns interest over time, and after 20 years, it is may provide to be worth at least its full face value of $100—meaning your $50 investment will have at least doubled.

The interest rate on Series EE bonds is set by the Treasury and changes every six months, on May 1 and November 1. The rate applies to all bonds purchased during that six-month period. Once you buy your bond, the rate it earns stays the same for the life of the bond. You can find the current rate on TreasuryDirect.gov before you purchase.

Interest compounds semiannually, which means every six months the Treasury adds the interest you've earned to your bond's value, and then the next interest payment is calculated on that larger amount. This is why your money grows faster over time—you're earning interest on your interest.

Series EE bonds reach final maturity after 30 years. At that point, they stop earning interest, and you should cash them in or move the money elsewhere.

How Series I bonds work

A Series I bond is sold at face value—you pay $100 for a $100 bond—and its interest rate changes every six months based on inflation. The Treasury combines a fixed rate (which never changes) with an inflation rate (which adjusts twice a year) to create your total interest rate.

For example, if the fixed rate is 1.0% and the inflation rate is 3.5%, your total rate is 4.5% for that six-month period. When the next six-month period begins, the inflation part changes based on new inflation data, but your fixed rate stays at 1.0% for the entire life of the bond.

This structure means Series I bonds protect you against inflation—if prices rise, your interest rate rises with them. If inflation drops, your rate drops too, but it never goes below the fixed rate you locked in at purchase. Like Series EE bonds, interest compounds semiannually.

Series I bonds also reach final maturity after 30 years and stop earning interest at that point.

When you can cash in your bond and what happens if you cash early

You must hold a savings bond for at least one year before you can cash it in. If you try to cash it before that year is up, the Treasury will not allow it.

If you cash your bond between one year and five years of ownership, you lose the last three months of interest. For example, if you bought a bond on January 1 and cashed it on March 1 of the following year, you would receive interest only through September 30 of the previous year—a three-month penalty.

After five years of ownership, you can cash your bond without any interest penalty. You receive the full value of the bond plus all interest earned to that point. You can cash bonds at any time after the five-year mark, up until they reach final maturity at 30 years.

You cash bonds through TreasuryDirect.gov. The money is deposited into your bank account within a few business days. You can also cash bonds at a bank or credit union, though TreasuryDirect is usually faster.

How to buy savings bonds

The only official way to buy new savings bonds is through TreasuryDirect.gov, the U.S. Treasury's website. You create an account, link a bank account for funding, and purchase bonds directly from the government. There is no middleman, no fees, and no commission.

You can buy as little as $25 per bond and as much as $10,000 per bond type per calendar year. If you want to buy more than $10,000 in Series EE bonds in a single year, you cannot do it through TreasuryDirect, though you can buy more through other channels like a bank or broker (though those routes may charge fees).

Bonds are held in electronic form in your TreasuryDirect account. You do not receive a physical certificate in the mail. Your account shows the current value of each bond, the interest rate, and the date it reaches final maturity.

You can set up a one-time purchase or arrange for regular monthly purchases through automatic bank transfers. Many people use monthly purchases to build savings gradually without having to remember to buy each month.

How taxes work on savings bonds

Interest earned on savings bonds is subject to federal income tax, but not to state or local income tax. This is one advantage savings bonds have over some other savings vehicles.

You have two choices for when to pay federal tax on the interest. You can report the interest each year as you earn it, or you can wait and pay all the tax when you cash the bond or when it reaches final maturity. Most people choose to wait and pay it all at once, since that keeps more money in the bond earning interest for longer.

When you cash your bond, the Treasury sends you a Form 1099-INT showing how much interest you earned. You use this form to report the interest on your federal tax return.

If you use the bond proceeds to pay for may have access to education expenses—tuition and fees at an accredited college, university, or vocational school—you may be able to exclude some or all of the interest from your taxable income. This is called the Education Savings Bond Program. There are income limits and other rules, so check IRS.gov for current details if this applies to you.

Series EE vs. Series I: which should you choose

The choice between Series EE and Series I depends on what you think will happen to inflation and how long you plan to hold the bond. If you believe inflation will stay low or fall, a Series EE bond's fixed rate may be more attractive. If you expect inflation to rise or want protection against rising prices, a Series I bond makes more sense.

Series EE bonds are also better if you want a may provide return—you know for certain that your $50 investment will be worth at least $100 after 20 years. Series I bonds do not have a may provide doubling, but they adjust with inflation, so their real purchasing power is more stable.

You can own both types at the same time. Many people buy a mix of each to balance the benefits. Since you can buy up to $10,000 of each type per year through TreasuryDirect, you could purchase $5,000 of Series EE and $5,000 of Series I in the same year if you wanted.

Check the current interest rates on TreasuryDirect.gov before you decide. The rates change every six months, so the comparison between the two types shifts over time.

Frequently Asked Questions

Can I lose money on a savings bond?

No. The U.S. government backs savings bonds, so your principal is may provide. At worst, if you cash early or rates are very low, you might earn less interest than you hoped, but you will always get your money back. Series EE bonds are even more protected—they are may provide to double in value over 20 years.

What happens if I lose my TreasuryDirect password?

You can reset your password through the TreasuryDirect website using your email address or username. If you cannot access your account that way, you can call TreasuryDirect customer service at 844-284-2676 to verify your identity and regain access. Your bonds are safe—they are held by the government, not on your computer.

Can I gift a savings bond to someone else?

Yes. You can buy a bond and register it in someone else's name, or you can transfer a bond you own to another person. The person receiving the bond becomes the owner and can cash it in whenever they choose (after meeting the one-year holding requirement). You can do this through your TreasuryDirect account.

Do savings bonds earn interest while I own them, or only when I cash them?

Savings bonds earn interest continuously while you own them. The interest is added to the bond's value every six months. You do not have to do anything for this to happen—it occurs automatically. When you cash the bond, you receive the full value including all interest earned.

What's the difference between a savings bond and a Treasury bill or Treasury note?

Savings bonds are designed for individual savers and are sold in small denominations starting at $25. Treasury bills, notes, and bonds are sold in larger amounts and are often bought by institutions or wealthy investors. Savings bonds also have special features like the Series EE doubling may provide and Series I inflation protection that other Treasury products do not offer.