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Savings bonds 101: How they work and what you need to know

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Savings bonds are a type of debt security issued by the U.S. government. Unlike typical bonds that pay interest regularly, a savings bond is a zero-coupon bond, meaning it pays interest only when it is redeemed by the owner. The bond is also nontransferrable, so it can’t be sold to someone else, which distinguishes it from more typical bonds.

If you’re considering savings bonds as part of a personal savings plan, there are some important details to know about how the bonds work.

Savings bonds FAQ

What is a savings bond?

Savings bonds are an easy way for individuals to loan money directly to the government and receive a return on their investment.

Bonds are sold at face value, for example, a $50 bond costs $50. Bonds accrue interest, and your gains are compounded, meaning that interest is earned on interest.

Savings bonds differ from traditional bonds in several key ways:

  • Unlike a traditional bond, which pays out cash interest regularly, a savings bond doesn’t pay until you redeem it — though the bond accrues interest over time.
  • Though traditional bonds mature on specific dates and then cease to exist, savings bonds can be redeemed at any time from a year to 30 years after they are issued.
  • With traditional bonds, the owner pays taxes on interest payments, but an owner of a savings bond doesn’t pay taxes until the bond is redeemed.
  • Unlike most traditional bonds, the interest on Series EE or Series I savings bonds is only subject to federal income taxes, not state or local.
  • A buyer of traditional bonds can purchase any amount at any time, but purchasers of savings bonds are limited to buying $10,000 in each bond series (so $20,000 total) a year.

How do savings bonds work?

Savings bonds work by paying interest, and the earned interest compounds. Though a savings bond accrues interest over time, it isn’t paid out until the bond is redeemed.

Savings bonds can only be redeemed by the owner, and they’re not resellable. The bond can be redeemed directly with the government, or in the case of a paper bond, with the government or a financial institution.

Savings bonds can be purchased directly from the U.S. government on the Treasury’s Department’s TreasuryDirect website. Series EE and Series I bonds can be purchased in electronic form, while Series I paper bonds are also available to be purchased with your IRS tax refund.

All electronic savings bonds can be purchased in any amount from $25 t0 $10,000, while paper bonds are limited to $50, $100, $500 and $1,000 denominations.

If a paper bond is lost, stolen, destroyed or otherwise mutilated, a replacement electronic bond can be requested.

Different types of savings bonds

U.S. savings bonds come in a three series, only two of which are still issued:

Series E bonds

The U.S. government first issued Series E bonds to fund itself during World War II, and it continued to sell them until 1980, when Series EE bonds superseded them. Series E bonds are no longer issued.

Series EE bonds

Series EE bonds were first issued in 1980 and continue to be issued today. These bonds pay a variable rate if issued from May 1997 to April 2005, or a fixed rate if issued in May 2005 or after.

Series I bonds

Series I bonds provide a greater level of protection against inflation than do Series EE bonds: They come with a combination of a guaranteed fixed rate and a variable inflation rate that is set twice a year, based on the consumer price index.

How to cash in savings bonds

Both Series EE and Series I bonds can be cashed in once they are a year old. If you cash in either series sooner than five years, you’ll lose the last three months of interest payments.

Both series of bonds earn interest for as long as 30 years. The longer you hold the bond, the more interest it accrues, but not beyond the 30-year limit.

Paper bonds can be redeemed at most bank or credit union branches, while electronic bonds can be cashed on the TreasuryDirect website, by signing into your account and following the instructions for redeeming the bond. The cash value of the bond will be credited to your checking or savings account within two business days of the redemption date.

A minimum $25 is required to redeeming an electronic bond. No limit typically exists for cashing paper bonds, but the bank cashing the bonds may impose a restriction on how much you can redeem at one time.

Are savings bonds worth it?

Advantages

  • Savings bonds are issued directly by the Treasury and backed by full faith and credit of the U.S. government.
  • Only federal income tax applies to savings bonds, not state or local taxes (unless your state has estate or inheritance taxes).
  • Savings bonds can be used to pay for higher education expenses and thereby avoid paying taxes on some or all of the interest on the bonds. Details are on the TreasuryDirect website.
  • Series I bonds offer some protection against inflation because the rate adjusts in response to changes in the consumer price index.
  • Series EE bonds have a special feature: the Treasury guarantees that an electronic EE bond issued in June 2003 or later can be redeemed for at least twice the face value. If the interest rate isn’t enough to double the bond’s value, then the Treasury makes a one-time adjustment 20 years after the bond was issued to make up the difference. In effect, if you hold a Series EE bond for 20 years, you’d earn an annual yield of at least 3.5 percent.

Disadvantages

  • Savings bonds can have relatively low yields. Series EE bonds issued from May to October 2022 earn a rate of just 0.1 percent, while Series I bonds issued during the same period pay a much higher 9.62 percent yield, which will fluctuate depending on the consumer price index.
  • Savings bonds aren’t very flexible. They’re locked in for at least a year and incur a penalty of the last three months’ interest if redeemed in less than five years.
  • Individuals are limited to how much they can invest in savings bonds — $10,000 a year in each series.

Bonds vs. savings accounts

Pros and cons of bonds

Pros Cons
Series I bonds can offer a higher yield than savings accounts. Bonds can’t be cashed in for at least a year, and there’s a penalty for redeeming any bond before five years have passed.
Bonds are backed by the U.S. government. Savers can earn more on a savings account than from a Series EE bond (unless they are able to take advantage of the bond’s special 20-year privilege).

Pros and cons of savings accounts

Pros Cons
Savers can generally withdraw money from the account up to six times a month without penalty. Savings account yields typically fall when interest rates fall.
Savings accounts are backed by the Federal Deposit Insurance Corp., which insures the account up to $250,000 per individual, per institution. Some savings accounts may have minimum balance requirements that are higher than bonds.
Some savings accounts, especially high-yield accounts, may pay better interest than a savings bond.

Bottom line

Savings bonds are among the safest investment types, as safe as any government-backed type of investment such as high-yield savings accounts. Some factors to consider before investing in a savings bond include the bonds’ one year minimum for holding the funds and the interest rate offered — rates on different series can vary markedly.

Those considering savings bonds but searching for higher interest rates and more flexibility may also want to consider certificates of deposit, another savings vehicle offered by many federally backed banks and credit unions. Bankrate’s list of the best CDs compiles the highest CD rates available and is a good place to compare options.

–Staff writer James Royal contributed to a previous version of this article.

Written by
René Bennett
Banking writer
René Bennett is a writer for Bankrate, reporting on banking products and personal finance.
Edited by
Wealth editor