A savings bond is a loan you give to the U.S. government that it pays back with interest

When you buy a savings bond, you are lending money to the federal government. The government promises to pay you back the amount you lent, plus interest, after a set period of time. You cannot withdraw the money early without losing some of the interest you earned — that is the trade-off for a may provide return.

Savings bonds are issued by the U.S. Department of the Treasury. They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. You cannot lose the principal amount you put in, though the interest rate you earn depends on which type of bond you buy and when you buy it.

The two types of savings bonds available to individuals are Series EE bonds and Series I bonds. Each works differently and suits different financial situations. Understanding the difference between them helps you decide which one makes sense for your money.

Key Takeaways

  • A savings bond is a Treasury security where you lend money to the federal government and receive it back with interest after a fixed holding period.
  • Series EE bonds earn a fixed interest rate set by the Treasury, while Series I bonds earn 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 you lose the last three months of interest if you cash it before five years.
  • You can buy savings bonds through TreasuryDirect, the official government website, for as little as $25 per bond.
  • Interest earned on savings bonds is exempt from state and local income taxes, though you do owe federal income tax on the earnings.

How Series EE bonds work

A Series EE bond earns a fixed interest rate that the Treasury sets and announces twice per year — in May and November. The rate you receive depends on the month you purchase the bond. Once you buy it, that rate stays the same for the entire 30-year life of the bond.

You buy a Series EE bond at half its face value. For example, a $100 bond costs you $50. The Treasury guarantees that if you hold the bond for 20 years, it will be worth at least its face value — so your $50 investment will grow to at least $100. After 20 years, it continues to earn interest at the same fixed rate for another 10 years, up to 30 years total.

Series EE bonds are straightforward because you know exactly what interest rate you will earn from the day you buy it. This makes them predictable but also means that if inflation rises sharply, your fixed rate may not keep up with the rising cost of living.

How Series I bonds work

A Series I bond earns interest that changes every six months. The rate is made up of two parts: a fixed rate set by the Treasury, and an inflation rate based on the Consumer Price Index (CPI). The Treasury announces the combined rate in May and November, and your bond's earnings adjust on those dates.

You buy a Series I bond at face value — a $50 bond costs $50. The inflation component protects your purchasing power: if prices rise, your bond earns more interest. If inflation falls, your earnings fall too, but the fixed portion of your rate means you will always earn something.

Series I bonds are useful when you are concerned about inflation eating into your savings. The trade-off is that you cannot predict your exact earnings ahead of time, since the rate changes twice yearly. Like Series EE bonds, you must hold a Series I bond for at least 30 years to earn interest for the full period, though you can cash it in earlier.

When you can cash in a savings bond

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

If you cash in a bond between one and five years, you lose the last three months of interest. For example, if you hold a bond for two years and then cash it in, you receive interest for only 21 months. This penalty discourages early withdrawal and is why savings bonds work best for money you do not need in the near term.

After five years, you can cash in the bond without losing any interest. You can hold it longer if you wish — both Series EE and Series I bonds continue to earn interest for 30 years. After 30 years, the bond stops earning interest and you should cash it in.

How to buy savings bonds through TreasuryDirect

The only way to buy new savings bonds is through TreasuryDirect, the official website run by the U.S. Department of the Treasury at treasurydirect.gov. You cannot buy them through a bank or broker.

To buy a bond, you create an account on TreasuryDirect with your Social Security number, email address, and a bank account for funding purchases and receiving redemptions. You can buy as little as $25 per bond, and you can purchase up to $10,000 in electronic bonds per calendar year (the limit is per person, not per account).

Once you set up your account, you choose which type of bond you want, how many you want to buy, and confirm the purchase. The money is withdrawn from your bank account, and the bonds are held electronically in your TreasuryDirect account. You do not receive a physical certificate in the mail.

Tax treatment of savings bond interest

Interest you earn on savings bonds is subject to federal income tax. You report it on your federal tax return in the year you cash in the bond, or you can choose to report it each year as it accrues — most people wait until they cash it in.

The interest is exempt from state and local income taxes. This is a real advantage if you live in a state with high income tax rates, because you keep more of your earnings.

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 the interest from federal income tax as well. This is called the Education Savings Bond Program, and it has income limits and other requirements. You should speak with a tax professional to see if you may have access to.

Savings bonds versus other savings options

Savings bonds are safest but often earn less than other options. A high-yield savings account at a bank may offer a higher interest rate and lets you withdraw money without penalty after a short waiting period. However, bank deposits are only insured up to $250,000 per depositor per bank, whereas savings bonds are backed by the U.S. government.

Certificates of deposit (CDs) also lock up your money for a set time, but they often pay more interest than savings bonds and are easier to buy through any bank. The downside is that CDs are only insured up to $250,000, and early withdrawal penalties can be steep.

Treasury bills, notes, and bonds (different from savings bonds) are also government-backed and can be bought through TreasuryDirect, but they require larger minimum purchases and are meant for different time horizons. Savings bonds are designed for individual savers who want a straightforward, safe place to park money for years.

Frequently Asked Questions

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

Yes. You can buy a Series EE or Series I bond and register it in someone else's name, or you can buy it in your name and give it to them. If you register it in their name, they own it and can cash it in once they meet the holding requirements. TreasuryDirect lets you specify the recipient when you purchase.

What happens if I lose my TreasuryDirect password?

You can reset your password on the TreasuryDirect login page using your email address and Social Security number. If you cannot access your email, you will need to contact TreasuryDirect customer service by phone or mail to verify your identity and regain access to your account.

Do I have to report savings bond interest every year?

No. Most people report the interest only in the year they cash in the bond. However, you can choose to report it each year as it accrues if you prefer. Once you choose one method, you must stick with it for that bond. A tax professional can help you decide which approach is better for your situation.

Can I cash in a savings bond at my bank?

No. You must cash in savings bonds through TreasuryDirect using your online account, or by mailing a form to the Treasury. Banks do not handle savings bond redemptions. You can set up TreasuryDirect to deposit the cash directly into your bank account when you cash in a bond.

What is the difference between a savings bond and a Treasury bond?

Savings bonds are designed for individual savers and have small minimum purchases ($25) and annual purchase limits ($10,000). Treasury bonds are sold in larger denominations and are traded on the secondary market. Savings bonds cannot be sold to someone else — only the registered owner can cash them in.