What U.S. savings bonds are and how they earn money

A U.S. savings bond is a debt security issued by the U.S. Department of the Treasury. When you buy one, you lend money to the federal government, and in return the government pays you interest over time. You buy the bond at a discount to its face value—for example, you might pay $50 for a $100 bond—and the bond grows toward its full value as interest accrues.

The two types currently sold are Series EE bonds and Series I bonds. Series EE bonds earn a fixed interest rate set by the Treasury and announced twice yearly (in May and November). Series I bonds earn a combined rate: a fixed portion plus an inflation rate that adjusts every six months based on the Consumer Price Index. The inflation-adjusted rate means Series I bonds protect your purchasing power when prices rise.

You purchase savings bonds through TreasuryDirect, the official government website. You cannot buy them through a bank or broker. You own the bond until you decide to cash it in, which you can do online through your TreasuryDirect account.

Key Takeaways

  • Series EE bonds earn a fixed rate of interest; Series I bonds earn a fixed rate plus an inflation adjustment that changes twice per year.
  • You buy bonds through TreasuryDirect at a discount (paying $50 for a $100 bond, for example) and they grow toward full value as interest accrues.
  • Bonds must be held for at least one year before you can redeem them, and you lose the last three months of interest if you cash them in before five years have passed.
  • Interest on savings bonds is exempt from state and local income tax; federal tax is due only when you redeem the bond or it reaches final maturity.
  • You can set up automatic monthly purchases through TreasuryDirect and hold bonds in a TreasuryDirect account linked to your bank account.

How to buy savings bonds through TreasuryDirect

To purchase savings bonds, you must create an account on TreasuryDirect.gov with a Social Security number or Individual Taxpayer Identification Number, a valid email address, and a U.S. bank account. The account setup takes about 15 minutes and requires you to verify your identity through a third-party service.

Once your account is open, you can buy bonds in amounts from $25 to $10,000 per bond type per calendar year. You can purchase them as a one-time transaction or set up recurring monthly purchases of $25, $50, $100, or $500. The money is deducted directly from your linked bank account. You receive no physical certificate; the bond exists only as a digital record in your TreasuryDirect account.

You can also buy savings bonds as gifts for others. The recipient does not need their own TreasuryDirect account; you manage the gift bond in your account until they claim it, which they can do at any time.

When you can cash in your bond and what penalties explore

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

If you redeem the bond between one and five years of ownership, you lose the last three months of interest. For example, if you cash in a bond after two years, you receive only 21 months of interest, not 24 months. After five years of ownership, you can redeem the bond and receive all accrued interest with no penalty.

Series EE bonds reach final maturity after 30 years. Series I bonds reach final maturity after 30 years as well. Once a bond reaches maturity, it stops earning interest, so you should redeem it or the interest stops growing. You redeem bonds through your TreasuryDirect account, and the money is deposited into your linked bank account within a few business days.

How interest accrues and compounds

Interest on savings bonds is compounded semiannually, meaning the Treasury calculates interest on your principal plus any interest already earned. For Series EE bonds, the fixed rate is applied every six months. For Series I bonds, the combined rate (fixed plus inflation) is applied every six months.

The bond's value grows automatically in your TreasuryDirect account; you do not need to do anything. You can log in anytime to see the current value of each bond you own. The value shown is what you would receive if you redeemed it that day, accounting for any early-redemption penalty.

Series EE bonds are may provide to double in value within 20 years if held that long. This may provide applies regardless of the interest rate environment. If the semiannual interest calculations do not result in the bond doubling by the 20-year mark, the Treasury makes an adjustment to bring it to exactly double the purchase price.

Tax treatment of savings bond interest

Interest earned on U.S. savings bonds is exempt from state and local income tax. You owe federal income tax on the interest, but you have a choice about when to report it: you can report it each year as it accrues, or you can defer reporting it until you redeem the bond or it reaches final maturity.

Most people choose to defer and report all the interest in the year they cash in the bond. This can be useful if you expect to be in a lower tax bracket in a future year. However, if you own a bond that reaches final maturity and you do not redeem it, you must report the interest on your tax return for that year even though you have not received the money.

If you use savings bond proceeds to pay for may have access to education expenses in the same year you redeem the bond, you may be able to exclude some or all of the interest from federal taxation. This applies to Series EE and Series I bonds purchased after 1989 by the bond owner who is at least 24 years old at the time of purchase. The education exclusion has income limits that change yearly.

Comparing Series EE and Series I bonds

The main difference between the two types is how interest is calculated. Series EE bonds pay a fixed rate that does not change over the life of the bond. Series I bonds pay a fixed rate plus an inflation rate that adjusts every six months (in May and November) based on inflation data released by the Bureau of Labor Statistics.

Series EE bonds are better if you expect inflation to remain low or if you prefer the certainty of a fixed return. Series I bonds are better if you want protection against rising prices, since the inflation component means your interest rate rises when inflation rises. However, the inflation component can also fall if deflation occurs, though the combined rate on Series I bonds cannot go below zero.

Both types have the same purchase limits ($10,000 per type per calendar year), the same one-year holding requirement, the same five-year early-redemption penalty, and the same tax treatment. The choice between them depends on your view of future inflation and your preference for a predictable rate versus inflation protection.

What happens if you lose access to your TreasuryDirect account

If you forget your password, you can reset it through the TreasuryDirect website using your email address and Social Security number. If you lose access to your email account, you can contact TreasuryDirect customer service by phone at 844-284-2676 to verify your identity and regain access.

If you die, the bonds in your TreasuryDirect account become part of your estate. The executor or administrator of your estate can contact TreasuryDirect to transfer the bonds to the appropriate beneficiary or to redeem them. Bonds do not pass outside of probate, so they will be subject to the estate settlement process.

If your TreasuryDirect account is compromised or you suspect fraud, contact customer service when ready. TreasuryDirect can freeze your account and investigate unauthorized transactions.

Frequently Asked Questions

Can I buy savings bonds for someone else as a gift?

Yes. You can purchase a gift bond through your TreasuryDirect account and specify the recipient's name and Social Security number. The bond remains in your account until the recipient claims it. They can claim it at any time by creating their own TreasuryDirect account and requesting the transfer. Once transferred, they own the bond and can redeem it whenever they choose.

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

Savings bonds are designed for individual savers and cannot be sold or transferred to another person (except as a gift claim). Treasury bills, notes, and bonds are marketable securities that you can buy and sell on the secondary market. Savings bonds also have lower purchase amounts and different interest structures. Treasury securities are purchased through banks or brokers, while savings bonds are purchased only through TreasuryDirect.

Can I redeem my bond before one year if it is an emergency?

No. TreasuryDirect will not process a redemption request before the one-year holding period is complete, regardless of the reason. If you need cash urgently, you would need to use another source. After one year, you can redeem the bond anytime, though you will lose three months of interest if you do so before the five-year mark.

Do I have to report the interest every year, or can I wait until I cash in the bond?

You can choose either method. Most bondholders defer and report all interest in the year they redeem the bond. However, if the bond reaches final maturity (30 years) and you do not redeem it, you must report the interest that year even if you have not cashed it in. Consult a tax professional about which method works best for your situation.

What happens if I need to cash in my bond between one and five years?

You can redeem it anytime after one year, but you will forfeit the last three months of interest. For example, if you cash in after three years, you receive 33 months of interest instead of 36 months. After five years, there is no penalty and you receive all accrued interest.