Savings bonds are a form of debt security issued by the U.S. government. Unlike traditional bonds that provide regular interest payments, savings bonds are zero-coupon bonds, meaning they only pay interest when redeemed. Additionally, savings bonds are nontransferable, so they cannot be sold to others, setting them apart from standard bonds.

If you’re thinking about including savings bonds in your personal savings strategy, it’s important to understand how they function.

What is a savings bond?

Savings bonds offer a straightforward way for individuals to lend money directly to the government and earn a return on their investment.

Here’s how savings bonds work:

  • They are sold at face value (e.g., a $50 bond costs $50).
  • They accrue interest over time, with gains compounded—meaning you earn interest on your interest.

Savings bonds differ from traditional bonds in several important ways:

Traditional BondSavings Bond
Pays out cash interest regularlyPays out accrued interest only when redeemed
Matures on a specific dateCan be redeemed anytime after one year from the issue date
Interest is taxed annuallyInterest is taxable either when received or reported annually, at the owner’s choice
Subject to local, state, and federal taxesOnly subject to federal taxes
Can be purchased in any amount at any timeLimited to $10,000 per series per year (up to $20,000 total)

How savings bonds work

Savings bonds earn interest that compounds over time, but this interest is not paid out until the bond is redeemed.

Key features of savings bonds include:

  • Redemption: Only the bond’s owner can redeem it, and savings bonds cannot be resold. They can be redeemed directly with the government or, for paper bonds, at a financial institution.
  • Purchase: Savings bonds can be bought directly from the U.S. Department of the Treasury via the TreasuryDirect website. Series EE and Series I bonds are available electronically, while Series I paper bonds can only be purchased using your IRS tax refund.
  • Denominations: Electronic savings bonds can be purchased in amounts ranging from $25 to $10,000. Paper bonds are available in denominations of $50, $100, $500, and $1,000, with a maximum purchase limit of $5,000 per year.
  • Replacement: If a paper bond is lost, stolen, destroyed, or damaged, you can request a replacement in electronic form.

Different types of savings bonds

U.S. savings bonds are available in three series, two of which are currently issued:

  • Series E Bonds: Issued by the U.S. government from World War II until 1980, Series E bonds were discontinued when Series EE bonds were introduced. These bonds are no longer available.
  • Series EE Bonds: First issued in 1980, Series EE bonds are still available today. They offer a variable interest rate for bonds issued from May 1997 to April 2005 and a fixed interest rate for those issued from May 2005 onwards.
  • Series I Bonds: Series I bonds are designed to protect against inflation. They combine a guaranteed fixed interest rate with a variable inflation rate, which is adjusted semiannually based on the consumer price index.

Are savings bonds worth it?

Advantages

  • Safety: Savings bonds are issued by the U.S. Treasury and backed by the full faith and credit of the U.S. government, making them a secure investment.
  • Tax Benefits: Savings bonds are exempt from state and local taxes. Only federal income tax applies, though you may be able to exclude the interest from taxes if the bonds are used for qualified higher education expenses. For more details, check the TreasuryDirect website.
  • Inflation Protection: Series I bonds offer protection against inflation, as their interest rate adjusts semiannually based on changes in the consumer price index.
  • EE Bond Guarantee: Electronic Series EE bonds issued from June 2003 onward are guaranteed to double in value after 20 years. More information is available on the TreasuryDirect website.

Disadvantages

  • Yield: Savings bonds generally offer lower yields compared to other savings products. For instance, Series EE bonds issued between May and October 2024 earn a 2.7% rate, while Series I bonds during the same period offer a 4.3% yield that varies with the consumer price index.
  • Flexibility: Savings bonds are less flexible; they have a minimum holding period of one year and incur a penalty of the last three months’ interest if redeemed before five years.
  • Purchase Limits: There are annual purchase limits for savings bonds—$10,000 per person per series and $5,000 per person for paper Series I bonds.

How to cash in savings bonds

Both Series EE and Series I bonds can be redeemed after they’ve been held for at least one year. If you redeem them before five years, you’ll forfeit the last three months of interest.

These bonds earn interest for up to 30 years. The longer you hold them, the more interest they accrue, but they will not earn interest beyond the 30-year period.

Paper bonds can be cashed at most banks or credit unions, while electronic bonds are redeemed through the TreasuryDirect website. To redeem an electronic bond, log in to your TreasuryDirect account and follow the instructions. The bond’s cash value will be credited to your checking or savings account within two business days of redemption.

A minimum redemption amount of $25 applies to electronic bonds. There is generally no limit on redeeming paper bonds, but the bank may impose limits on the amount you can cash at one time.

Bonds vs. savings accounts

Both savings bonds and many savings accounts are backed by the U.S. government, but they differ in terms of returns and accessibility.

Savings accountsSavings bonds
InterestHigh-yield savings accounts often offer higher interest rates compared to savings bonds.Series EE bonds generally offer lower interest rates compared to many savings accounts, while Series I bonds provide yields comparable to competitive savings accounts.
AccessibilityFunds can typically be withdrawn up to six times a month without penalties.Bonds cannot be redeemed until they are at least a year old, and redeeming them before five years incurs a penalty.
SafetyBacked by the U.S. government.Backed by the U.S. government

In Conclusion

Savings bonds are one of the safest investment options available, comparable to other government-backed investments like online high-yield savings accounts. When considering savings bonds, it’s important to evaluate the interest rate offered and your expected timeline for accessing the funds.

Another secure investment alternative to savings bonds and savings accounts is certificates of deposit (CDs). CDs often offer higher interest rates and are typically provided by federally insured banks and credit unions.