Savings bonds are a type of debt security issued by the US government. Unlike typical bonds that pay interest regularly, a savings bond is a zero-coupon bond, meaning it only pays interest when repaid by the owner. The bond is also non-transferable, so it cannot be sold to someone else, which sets it apart from more typical bonds.
If you’re considering savings bonds as part of a personal savings plan, there are some important details you need to know about how bonds work.
Savings Bond FAQs
What is a savings bond?
Savings bonds are an easy way for individuals to lend 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 earn interest and your earnings are compounded, which means interest is earned on the interest.
Savings bonds differ from traditional bonds in several ways:
- Unlike a traditional bondwhich regularly pays cash interest, a savings bond does not pay until you pay it off, although the bond accrues interest over time.
- Although traditional bonds mature on specific dates and then cease to existsavings bonds can be redeemed at any time between one and 30 years after their issuance.
- With traditional bondsthe owner pays taxes on interest payments, but the owner of a savings bond does not pay tax until the bond is repaid.
- Unlike most traditional bondsinterest on Series EE or Series I Savings Bonds is subject only to federal income tax, not state or local.
- A traditional bond buyer can buy any amount at any timebut buyers of savings bonds are limited to buying $10,000 of each series of bonds (so $20,000 in total) per year.
How do savings bonds work?
Savings bonds work by paying interest, and the interest earned is compounded. Although a savings bond accrues interest over time, it is not paid until the bond is redeemed.
Savings vouchers can only be redeemed by the owner and are not resalable. 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 US government on the Treasury Department’s TreasuryDirect website. Series EE and Series I bonds can be purchased electronically, while Series I paper bonds can also be purchased with your IRS tax refund.
All electronic savings bonds can be purchased in any amount from $25 to $10,000, while paper bonds are limited to $50, $100, $500 and $1,000.
If a paper deposit is lost, stolen, destroyed or otherwise mutilated, a replacement electronic deposit may be requested.
Different types of savings bonds
U.S. savings bonds come in three series, of which only two are still issued:
Series E Bonds
The US government first issued Series E bonds to finance itself during World War II, and it continued to sell them until 1980, when Series EE bonds replaced 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 between May 1997 and April 2005, or a fixed rate if issued in May 2005 or later.
Series I Bonds
Series I bonds offer a better level of protection against inflation than Series EE bonds: they have a combination of a guaranteed fixed rate and a variable inflation rate set twice a year, based on the consumer price index.
How to Cash in Savings Bonds
Series EE and Series I bonds can be redeemed once they are one year old. If you cash out either series before five years, you will lose the last three months of interest payments.
Both series of bonds pay interest for 30 years. The longer you hold the bond, the more interest it pays, but not beyond the 30-year limit.
Paper bonds can be redeemed at most bank branches or credit unions, while electronic bonds can be redeemed on the TreasuryDirect website, by logging into your account and following the instructions to redeem 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 of $25 is required to redeem an electronic bond. There is generally no limit for cashing paper bonds, but the bank cashing the bonds may place a restriction on how much you can redeem at one time.
Are savings bonds worth it?
- Savings bonds are issued directly by the Treasury and backed by the full faith and credit of the United States Government.
- Only federal income tax applies to savings bondsnot state or local taxes (unless your state has estate or inheritance taxes).
- Savings bonds can be used to pay college fees and thus avoid paying taxes on all or part of the interest on the bonds. Details are on the TreasuryDirect website.
- Series I bonds offer some inflation protection because the rate adjusts according to changes in the consumer price index.
- Series EE bonds have a special feature: the Treasury guarantees that an EE electronic bond issued in June 2003 or later can be redeemed for at least twice the face value. If the interest rate is not enough to double the value of the bond, the Treasury makes a one-time adjustment 20 years after the bond is issued to make up the difference. Indeed, if you hold a Series EE bond for 20 years, you will earn an annual return of at least 3.5%.
- Savings bonds can have relatively low yields. Series EE bonds issued from May to October 2022 earn a rate of just 0.1%, while Series I bonds issued during the same period pay a much higher yield of 9.62%, which will fluctuate depending on the rate. based on the consumer price index.
- Savings bonds are not very flexible. They are blocked for at least one year and incur a penalty of interest for the last three months if they are repaid in less than five years.
- Individuals are limited to the amount they can invest in savings bonds — $10,000 per year in each series.
Advantages and disadvantages of bonds
|Series I bonds may offer a higher yield than savings accounts.||Bonds cannot be cashed in for at least one year, and there is a penalty for redeeming any bond before five years have elapsed.|
|The bonds are guaranteed by the US government.||Savers can earn more in a savings account than with a Series EE bond (unless they can take advantage of the bond’s special 20-year privilege).|
Advantages and disadvantages of savings accounts
|Savers can generally withdraw money from the account up to six times a month without penalty.||Yields on savings accounts generally fall when interest rates fall.|
|Savings accounts are backed by the Federal Deposit Insurance Corp., which insures the account up to $250,000 per person per institution.||Some savings accounts may have higher minimum balance requirements than bonds.|
|Some savings accounts, especially high-yield accounts, may earn better interest than a savings bond.|
At the end of the line
Savings bonds are among the safest types of investment, as safe as any type of government-backed investment, such as high-yield savings accounts. Some factors to consider before investing in a savings bond include the bond’s one-year minimum for holding the funds and the interest rate offered – rates on different series can vary widely.
Those considering savings bonds but looking for higher interest rates and more flexibility can also consider certificates of deposit, another savings vehicle offered by many federally backed banks and credit unions. . Bankrate’s Best CDs list compiles the highest CD rates available and is a good place to compare options.
–Editor James Royal contributed to an earlier version of this article.