What U.S. Savings Bonds Are

A U.S. Savings Bond is a loan you make to the federal government. You give the government money upfront, and in return they promise to pay you back that money plus interest over time. The government uses the money you lend to fund operations, and you earn a may provide return on your investment.

Savings bonds are issued by the U.S. Department of the Treasury. They are not the same as stocks or mutual funds — there is no company whose performance you are betting on. Your return comes directly from the interest rate the Treasury sets, which is the same for every person who buys a bond of that type in that month.

Savings bonds are backed by the full faith and credit of the U.S. government, which means the government has never defaulted on them. This makes them one of the lowest-risk investments you can own, though the tradeoff is that the interest rates are typically lower than what you might earn from stocks or corporate bonds.

Key Takeaways

  • Savings bonds are loans to the federal government that earn a set interest rate and cannot lose value once purchased.
  • Series EE bonds and Series I bonds are the two types sold to individual savers today, and they work differently — EE bonds have a fixed rate, while I bonds have a rate that adjusts every six months based on inflation.
  • You must hold a savings bond for at least one year before you can cash it in, and if you cash it in before five years, you lose the last three months of interest.
  • You can buy savings bonds through TreasuryDirect, the official government website, for as little as $25 per bond.
  • Savings bonds earn interest for up to 30 years, and you can pass them to heirs or transfer them if the original owner dies.

Series EE Bonds vs. Series I Bonds

The Treasury sells two main types of savings bonds to individual savers: Series EE and Series I. They have different interest structures, so the right choice depends on what you think inflation will do.

Series EE bonds pay a fixed interest rate that never changes. The Treasury sets this rate each month, and it applies to all EE bonds purchased that month. As of early 2024, the EE rate is much lower than it was in previous decades — typically less than 1 percent per year. The advantage is predictability: you know exactly how much your bond will be worth at any future date. The disadvantage is that if inflation rises, your purchasing power shrinks.

Series I bonds, also called inflation bonds, have a rate that changes every six months. The rate has two parts: a fixed portion that never changes, plus a variable portion that adjusts based on inflation. The variable portion is set in May and November each year based on the Consumer Price Index. This means I bonds protect you if inflation spikes, but your interest rate will also fall if inflation falls. The combined rate is announced on the Treasury website on the first business day of May and November.

If you are unsure which to choose, I bonds are usually the better option for most savers because they protect against inflation. However, if you believe inflation will fall significantly, EE bonds lock in a predictable return.

How to Buy Savings Bonds

You buy savings bonds through TreasuryDirect, which is the official government website run by the Bureau of the Fiscal Service. You cannot buy them from a bank or broker. You must create an account at treasurydirect.gov, provide your Social Security number, and link a bank account for electronic transfers.

The minimum purchase is $25 per bond, and you can buy up to $10,000 in electronic bonds per calendar year (per person, per bond type). If you want to buy more, you can purchase paper bonds through your tax refund — the IRS allows you to buy up to $5,000 in Series EE paper bonds when you file your tax return, though this option is less common now.

Once you set up your TreasuryDirect account, buying a bond takes a few minutes. You choose the bond type (EE or I), the amount, and the registration (whose name it is in). The money is withdrawn from your bank account, and the bond is recorded electronically in your account. You receive no physical certificate — everything is digital.

You can buy bonds on any business day. The interest rate you receive is the rate in effect for the month in which you purchase. If you buy on the 15th of a month, you get that month's rate. If you buy on the 1st of the next month, you get the new month's rate.

When You Can Cash In Your Bonds

Savings bonds have a holding period before you can access your money. You must hold a bond for at least one year before you can cash it in. If you try to redeem it before one year has passed, the Treasury will not allow it.

If you cash in a bond between one and five years after purchase, you lose the last three months of interest. This is called the early redemption penalty. For example, if you buy a bond in January and cash it in March of the following year (14 months later), you receive only 11 months of interest, not 14. This penalty exists to discourage people from treating savings bonds like a savings account.

After five years, you can cash in your bond without any penalty. You receive all the interest earned up to that point. You can hold the bond for up to 30 years total, and it will continue to earn interest the entire time.

To redeem a bond, you log into your TreasuryDirect account, select the bond, and request redemption. The money is transferred to your linked bank account within a few business days. You can redeem part of a bond if you own multiple bonds, or you can redeem the entire amount.

How Interest Is Earned and Paid

Savings bonds earn interest every month, but you do not receive monthly payments. Instead, the interest is added to the bond's value, and you receive all of it when you redeem the bond. This is called compound interest — the interest earns interest on itself.

For Series EE bonds, the interest calculation is straightforward. If the rate is 0.10 percent per year, that rate is applied to your principal every month (one-twelfth of the annual rate). The new total becomes your principal for the next month, and interest is calculated on that larger amount.

For Series I bonds, the calculation is more complex because the rate changes. The fixed portion stays the same for the life of the bond, but the variable portion changes every six months. The Treasury publishes the combined rate on its website, and your bond earns that rate for the six-month period. When the rate changes, your next six months of interest is calculated using the new combined rate.

You can see your bond's current value anytime by logging into TreasuryDirect. The site shows the original purchase price, the interest earned so far, and the total current value. This updates monthly on the first business day.

Tax Treatment of Savings Bond Interest

The interest you earn on savings bonds is subject to federal income tax, but not to state or local income tax. This is one advantage over some other investments.

You have two choices for when to pay the tax. You can report the interest each year as you earn it, even though you have not received the money yet. Or you can wait until you redeem the bond and report all the interest in that year. Most people choose the second option because it is simpler — you only file one tax report instead of many.

If you redeem a Series I bond and use the money to pay for may have access to education expenses (tuition and fees at an accredited school), you may be able to exclude the interest from your taxable income. This is called the Education Savings Bond Program. The bond must have been purchased when you were at least 24 years old, and there are income limits. You would report this on your tax return using Form 8815.

Risks and Limitations

Savings bonds are very safe, but they do have drawbacks. The main one is that the interest rates are low compared to other investments. If you buy a Series EE bond today, you are locking in a rate that is less than 1 percent per year. Over 30 years, that compounds slowly. A stock index fund or a corporate bond fund might earn more, though with more risk.

Another limitation is that your money is locked up for at least one year. If you need the cash sooner, you cannot get it. And if you need it between one and five years, you lose three months of interest, which can be a meaningful penalty on a small bond.

Series I bonds have an additional limitation: if inflation falls, your interest rate falls too. If deflation occurs (prices fall), your rate can go as low as zero, though the principal itself never loses value. You will not lose money, but you might earn nothing for a six-month period.

Savings bonds also do not keep pace with inflation as well as other investments. While Series I bonds are designed to track inflation, the fixed portion of the rate is often very low, so the total return may not fully offset inflation over long periods.

Frequently Asked Questions

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

Yes. When you purchase a bond through TreasuryDirect, you can register it in someone else's name. You would be the purchaser (the person who paid for it), and they would be the owner. The owner is the person who receives the interest and decides when to redeem it. You can also register a bond in both names as co-owners, though this is less common.

What happens to my savings bond if I die?

If you registered the bond in your name alone, it becomes part of your estate and passes to your heirs according to your will or state law. If you registered it with a beneficiary (a co-owner or a named beneficiary), that person receives it directly without going through probate. You can change the registration or add a beneficiary through your TreasuryDirect account.

Can I lose money on a savings bond?

No. The principal you invest is may provide. You will never receive less than what you paid for the bond. The worst case is that you earn zero interest (which can happen with Series I bonds if deflation occurs), but your original money is safe. This is why savings bonds are considered one of the safest investments.

What is the difference between electronic bonds and paper bonds?

Electronic bonds are purchased through TreasuryDirect and exist only as digital records in your account. Paper bonds are physical certificates that you hold. Paper bonds are no longer sold directly to the public — you can only get them through your tax refund. Electronic bonds are easier to manage and redeem, so they are the standard option today.

Can I sell my savings bond to someone else before it matures?

No. Savings bonds cannot be sold or transferred to another person on a secondary market. You can only redeem them back to the Treasury. This is different from Treasury notes or bonds, which can be bought and sold. The tradeoff for this restriction is that savings bonds have a may provide value and cannot fluctuate in price.