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

When you buy a U.S. savings bond, you are lending money to the U.S. Treasury. In return, the Treasury promises to pay you back your original amount plus interest after a set period of time. You cannot cash it in when ready — bonds have a maturity date, usually 20 or 30 years depending on the type. Before that date, you can cash it in early, but you will lose the last three months of interest as a penalty.

The federal government uses the money from bond sales to fund operations and pay down debt. For you, a savings bond is a way to set money aside that grows slowly but safely, because it is backed by the U.S. government. There is no stock market risk, no monthly fees, and no way to lose your principal — the amount you originally invested.

Savings bonds are different from other investments like stocks or mutual funds. You cannot sell a savings bond to another person on a market. You can only cash it in with the Treasury or through a bank, and only after holding it for a minimum period (usually one year).

Key Takeaways

  • A savings bond is a debt security issued by the U.S. Treasury that guarantees you will get your money back plus interest after the bond matures.
  • Series EE bonds and Series I bonds are the two types sold to individual buyers, and they differ in how interest is calculated and who they protect against inflation.
  • You must hold a savings bond for at least one year before cashing it in, and cashing it in before five years means losing the last three months of interest.
  • Savings bonds are purchased at face value (the amount you pay is the amount printed on the bond) and can be bought through TreasuryDirect.gov or a bank.
  • Interest earned on savings bonds is subject to federal income tax but may be exempt from state and local taxes, and can be tax-free if used for may have access to education expenses.

Series EE bonds versus Series I bonds

The Treasury sells two main types of savings bonds to individuals: Series EE and Series I. The difference is how they earn interest and what they protect you against.

Series EE bonds earn a fixed interest rate set by the Treasury every six months. That rate stays the same for the entire life of the bond. If you buy a Series EE bond today at 2.5 percent annual interest, it will earn 2.5 percent every year until it matures. This makes it straightforward to predict exactly how much money you will have at maturity. Series EE bonds take 20 years to reach their face value if purchased at a 50 percent discount (meaning you pay $50 for a $100 bond), though they continue earning interest beyond that point.

Series I bonds earn interest in two parts: a fixed rate plus an inflation rate. The fixed rate is set when you buy the bond and never changes. The inflation rate is recalculated every six months based on the Consumer Price Index, which measures how fast prices are rising. If inflation goes up, your I bond earns more. If inflation goes down, your I bond earns less (but never less than the fixed rate alone). Series I bonds are designed to protect your purchasing power when prices are rising. The interest rate on I bonds changes every May and November.

Choose Series EE if you want predictability and do not worry about inflation eroding your returns. Choose Series I if you want protection against rising prices and are willing to accept that your interest rate will fluctuate.

How to buy a savings bond

The easiest way to buy a U.S. savings bond is through TreasuryDirect.gov, the official online platform run by the Bureau of the Fiscal Service. You create an account, link a bank account, and purchase bonds electronically. Bonds bought through TreasuryDirect are held in digital form — you do not receive a physical certificate. You can buy as little as $25 or as much as $10,000 per bond type per calendar year through TreasuryDirect.

You can also buy savings bonds through a bank or credit union, though not all institutions offer them. Banks typically sell physical paper bonds, and the selection and minimum purchase amounts vary by location. Some banks charge a small fee for the transaction.

When you buy a bond, you pay the full face value upfront. A $100 Series EE bond costs $100. A $100 Series I bond also costs $100. The interest is added to the bond's value over time, and you receive it all when you cash the bond in.

When you can cash in a savings bond and what happens

You must hold a savings bond for at least one year before you can cash it in. If you cash it in before five years have passed, you lose the last three months of interest as a penalty. After five years, you can cash it in without any penalty.

To cash in a bond purchased through TreasuryDirect, you log into your account and request a redemption. The money is deposited into your linked bank account within a few business days. To cash in a physical paper bond, you take it to a bank or credit union and request redemption there.

When you cash in a bond, you receive your original investment plus all the interest it has earned. That interest is reported to the IRS on a Form 1099-INT, and you owe federal income tax on it in the year you cash the bond in. You can defer paying tax on the interest until the bond matures (up to 30 years), but you must make that choice when you file your tax return for the year you purchased the bond.

Tax treatment of savings bond interest

Interest earned on a U.S. savings bond is subject to federal income tax. You report it on your tax return in the year you cash the bond in, or you can choose to report it each year as it accrues (builds up). Most people wait until they cash the bond to pay tax, because it delays the tax bill.

Interest on savings bonds is not subject to state or local income tax in any state. This is a federal rule that applies everywhere. If you live in a state with high income tax, this is one advantage of savings bonds over other savings vehicles.

If you use Series EE or Series I bond interest to pay for may have access to education expenses — tuition and fees at an accredited college, university, or vocational school — the interest may be completely tax-free. This is called the Education Savings Bond Program. The bond must be registered in your name (not your child's), you must be at least 24 years old when you buy it, and the education expenses must occur in the same year you cash the bond. The rules are strict, so consult a tax professional if you think this applies to you.

How much interest you earn and how long it takes

The interest rate on savings bonds changes regularly. The Treasury sets new rates for Series EE bonds every six months (in May and November). Series I bonds also get new rates every six months, with the inflation component recalculated based on recent price changes. You can find current rates on TreasuryDirect.gov.

Series EE bonds purchased today earn a fixed rate that the Treasury announces. That rate applies to your bond for its entire life. Series I bonds earn a combined rate (fixed plus inflation) that changes every six months, so your earnings will vary depending on inflation during the time you hold the bond.

A Series EE bond reaches its face value in 20 years if the fixed rate is 3.5 percent annually. A $50 bond purchased at that rate becomes worth $100 after 20 years. If the rate is lower, it takes longer. Series I bonds do not have a may provide maturity date because the inflation component is unknown, but they continue earning interest for 30 years.

Risks and limitations of savings bonds

Savings bonds are among the safest investments because they are backed by the U.S. government. You cannot lose your principal. However, there are trade-offs. The interest rates on savings bonds are typically lower than you might earn from a high-yield savings account, a certificate of deposit (CD), or stock market investments over long periods. You give up the possibility of higher returns in exchange for safety and predictability.

You also cannot access your money quickly. If you need cash in an emergency and your money is in a savings bond, you will have to cash it in early and lose three months of interest (if you have held it less than five years). This makes savings bonds better for money you do not plan to touch for several years.

Inflation risk is real for Series EE bonds. If inflation rises significantly and you are locked into a low fixed rate, your purchasing power declines. Series I bonds protect against this, but their rates fluctuate, so you cannot predict your exact return.

Frequently Asked Questions

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

Yes. You can purchase a Series EE or Series I bond through TreasuryDirect and register it in another person's name. The recipient owns the bond and can cash it in after one year. If you buy it as a gift for a minor, a parent or guardian must set up the account and manage it until the child reaches age 18.

What happens if I lose a physical savings bond certificate?

Contact the Treasury's Savings Bond Division or visit TreasuryDirect.gov to report it lost or stolen. You will need to provide proof of purchase and identification. The Treasury can issue a replacement or pay you the current value. Bonds purchased through TreasuryDirect are digital and cannot be lost in this way.

Can I cash in a savings bond at any bank?

Not every bank cashes savings bonds. Call ahead to confirm. Banks that do cash them will verify the bond's authenticity and current value, then process the redemption. If you bought the bond through TreasuryDirect, you must redeem it through your TreasuryDirect account, not at a bank.

Is there a maximum amount I can buy each year?

Yes. Through TreasuryDirect, you can buy up to $10,000 per bond type (Series EE and Series I) per calendar year. If you buy paper bonds through a bank, the bank may have different limits. This annual cap resets on January 1.

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 traded. Treasury bills, notes, and bonds are sold in larger denominations and can be bought and sold on the secondary market. Treasury bills mature in less than one year, notes in 2 to 10 years, and bonds in 20 to 30 years. Savings bonds are simpler for small investors but offer less flexibility.