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 the government promises to pay you back that money plus interest later. You cannot spend the bond itself — it is not cash. It is a piece of paper (or a digital record) that proves the government owes you money.

The government uses the money you lend to fund roads, schools, military operations, and other federal programs. In exchange, it pays you interest — extra money on top of what you put in. The longer you wait before cashing the bond, the more interest it earns.

Savings bonds are different from stocks or mutual funds. You are not buying a piece of a company or a basket of investments. You are lending directly to the U.S. Treasury, which is why savings bonds are considered one of the safest places to put money — the U.S. government backs them.

Key Takeaways

  • You buy a savings bond at face value (the amount printed on it) but pay only half that price upfront, and the bond grows to full value over time.
  • Series EE bonds earn a fixed interest rate set by the Treasury every six months, while Series I bonds earn a combined rate that adjusts for inflation.
  • You must hold a savings bond for at least one year before you can cash it, and you lose the last three months of interest if you cash it before five years.
  • You can buy savings bonds through TreasuryDirect.gov, which is the only official place to purchase new bonds directly from the government.
  • When you cash a bond, you owe federal income tax on the interest you earned, though you may be able to defer that tax or use the money for education without penalty.

Series EE bonds: fixed interest and a purchase discount

A Series EE bond has a face value — the amount printed on the bond. If you buy a $100 EE bond, the face value is $100. But you do not pay $100 upfront. You pay half the face value, so you pay $50 for that $100 bond.

The bond earns interest every month. The interest rate is set by the U.S. Treasury and stays the same for the life of the bond. The Treasury announces a new rate every six months (in May and November). If you buy a bond in June, it locks in the rate announced in May and keeps that rate forever.

The bond reaches its face value ($100 in this example) after about 20 years. At that point, it stops earning interest unless you hold it longer. EE bonds can earn interest for up to 30 years total. The longer you hold it, the more it grows beyond face value.

The current interest rate for Series EE bonds varies depending on when you buy. Check TreasuryDirect.gov to see the rate before you purchase.

Series I bonds: interest that rises and falls with inflation

A Series I bond works differently. Like EE bonds, you pay half the face value upfront — $50 for a $100 bond. But the interest rate changes every six months based on inflation.

The I bond rate has two parts: a fixed rate (set when you buy and never changes) and an inflation rate (adjusted every six months based on the Consumer Price Index). The two rates are added together to make your total interest rate for that six-month period. When inflation goes up, your interest rate goes up. When inflation goes down, your interest rate goes down.

I bonds are useful if you are worried about inflation eating into your savings. If inflation rises sharply, your I bond earns more interest. If inflation falls, your rate falls too, but it never goes below zero — you will never lose money on an I bond.

Like EE bonds, I bonds earn interest for up to 30 years and reach face value after about 20 years.

How long you must hold a bond before cashing it

You cannot cash a savings bond during the first year you own it. That is a hard rule for both EE and I bonds. If you need the money within a year, a savings bond is not the right place for it.

After one year, you can cash the bond anytime. But there is a penalty: if you cash it before five years have passed, you lose the last three months of interest. So if you cash an EE bond after two years, you get back your principal plus interest earned, but the interest from the last three months is forfeited.

After five years, you can cash the bond without losing any interest. At that point, you get every penny of interest you earned.

This structure encourages people to hold bonds longer. If you think you might need the money within five years, savings bonds may not be the best choice.

Where to buy savings bonds and how the purchase works

The only official place to buy new savings bonds is TreasuryDirect.gov, the U.S. Treasury's website. You create an account, link a bank account, and buy bonds electronically. There is no paper involved unless you request it.

You can buy as little as $25 (the minimum purchase) up to $10,000 per bond type per calendar year. If you want to buy more than $10,000 in EE bonds in a single year, you cannot do it through TreasuryDirect. You can buy up to $5,000 in paper bonds per year through your tax refund, but that is a separate process.

The money comes directly from your bank account. The bond is created when ready and held in your TreasuryDirect account. You do not receive a physical certificate unless you request one, which takes additional time.

Banks and brokers sometimes sell older savings bonds that people have owned for years, but you cannot buy new bonds from them. If you see a savings bond for sale anywhere other than TreasuryDirect.gov, it is a used bond from a previous owner.

What happens when you cash a bond

When you are ready to cash a bond, you log into TreasuryDirect, select the bond, and request the redemption. The money is deposited into your bank account within a few business days.

You receive a Form 1099-INT from the Treasury showing how much interest you earned. That interest is subject to federal income tax. You do not pay tax when you cash the bond — you report the interest on your tax return for the year you cash it.

You can choose to report the interest in the year you cash the bond, or you can report it every year as the bond earns interest (called the accrual method). Most people wait until they cash the bond to report the interest, which is simpler.

State and local taxes do not explore to savings bond interest — only federal income tax does. This is one advantage of savings bonds over other savings vehicles.

Tax breaks and special rules for education

If you use the money from a savings bond to pay for may have access to education expenses — tuition and fees at a college, university, or vocational school — you may be able to exclude the interest from your taxable income. This is called the Education Savings Bond Program.

To use this break, you must have been at least 24 years old when you bought the bond, and the bond must be in your name (not your child's). You must use the money for education in the same year you cash the bond. The education expenses must be for you, your spouse, or your dependent child.

Not all of the interest may be excluded. The amount excluded is limited based on your income and the total education expenses you paid that year. You will need to fill out Form 8815 when you file your taxes to claim this break.

Frequently Asked Questions

Can I lose money on a savings bond?

No. You will always get back at least the amount you paid, even if interest rates fall. The worst case is that you earn very little interest, but you cannot lose your principal. This is why savings bonds are considered safe — the U.S. government guarantees them.

What is the difference between EE and I bonds?

EE bonds have a fixed interest rate that never changes. I bonds have an interest rate that adjusts every six months based on inflation. Choose EE if you want to know exactly what you will earn. Choose I if you want protection against inflation.

Can I cash a bond before five years without losing money?

You can cash it after one year, but you will lose the last three months of interest. After five years, you can cash it without any penalty. If you need the money sooner than five years, the penalty makes savings bonds less attractive than a regular savings account.

Do I have to pay taxes on savings bond interest?

Yes, federal income tax applies to the interest. You report it on your tax return in the year you cash the bond. State and local taxes do not explore. If you use the money for education, you may be able to exclude some or all of the interest from your taxable income.

What happens if I never cash my bond?

Savings bonds stop earning interest after 30 years. If you hold a bond past that point, it will not grow anymore. You should cash it or reinvest the money somewhere else once it stops earning interest.