Free Guide to Understanding US Savings Bonds

What Are US Savings Bonds?

US Savings Bonds are debt securities issued by the US Treasury Department. When you purchase a savings bond, you are lending money to the federal government. In return, the government pays you interest over time. Think of it as a savings account, but instead of keeping your money in a bank, you're holding an official government security.

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There are two main types of savings bonds available today: Series EE bonds and Series I bonds. Each type works differently and offers different benefits. Series EE bonds have been around since 1941, making them one of the longest-running savings products in the United States. Series I bonds are newer, introduced in 1998, and were designed to help protect savings from inflation.

Savings bonds are backed by the full faith and credit of the US government, meaning they carry virtually no default risk. This makes them among the safest investments a person can make. However, safety comes with a tradeoff: the interest rates on savings bonds are typically lower than what you might earn from stocks or other riskier investments.

The bonds are registered in your name, which means they cannot be transferred or stolen in a meaningful way. If your bond is lost or destroyed, you can request a replacement from the Treasury. This security feature has made savings bonds popular for long-term savings and gifts, particularly for children.

As of 2024, you can purchase savings bonds only through the Treasury Direct website, which is the official online platform of the US Treasury. In the past, you could buy paper bonds through banks, but the Treasury discontinued paper bond sales in 2011. All new bond purchases are now electronic.

Practical Takeaway: Savings bonds are a government-issued savings product that pays interest over time. They come in two varieties—EE and I—and offer safety and simplicity, though at lower interest rates than many other investments. Understanding which type suits your situation requires knowing how each one calculates interest.

How Series EE Bonds Work

Series EE bonds operate on a straightforward principle: you pay a purchase price, and the bond increases in value over time through interest. The minimum purchase amount is $25, and you can purchase them in any amount above that, up to $10,000 per calendar year per person through Treasury Direct. This annual limit applies to electronic EE bonds purchased online.

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When you buy a Series EE bond, you purchase it at face value—meaning a $100 bond costs $100. However, the bond is sold at a discount. As of recent years, the purchase price is 50% of the face value for new EE bonds, though this has varied historically. So you might pay $50 for a $100 bond. The difference between what you paid and what the bond is worth represents the interest earned over time.

One of the most notable features of EE bonds is the "final maturity guarantee." If your bond reaches 30 years old and hasn't doubled in value through interest earnings, the Treasury will automatically make up the difference so it reaches face value. For example, if you purchased a $100 EE bond for $50, and after 30 years it's only worth $95 due to low interest rates, the Treasury will increase its value to $100. This guarantee provides a safety net for long-term holders.

EE bonds continue to earn interest for 30 years. You can cash them in anytime after a one-year holding period, though if you redeem them within five years, you'll lose the last three months of interest as a penalty. This means if you hold the bond for exactly two years, you'd actually receive the interest value as of 23 months ago. After five years, you can redeem without penalty.

The interest rate on EE bonds is set by the Treasury and changes every six months on May 1 and November 1. The current rate applies to all new bonds purchased during that six-month period. For example, an EE bond purchased in June 2024 would earn whatever rate the Treasury set for the May 1, 2024 period. That rate stays with the bond for its first six months of ownership. After that, a new rate applies.

Practical Takeaway: Series EE bonds are purchased at a discount, double in value over approximately 20 years (depending on interest rates), and can be cashed in after one year without penalty if held at least five years. The 30-year final maturity guarantee ensures you'll at least break even on your investment.

How Series I Bonds Work

Series I bonds were created specifically to protect savings from inflation. An I bond's interest rate has two components: a fixed rate and an inflation rate. The fixed rate never changes for the life of the bond, but the inflation rate adjusts every six months based on official inflation data. This dual-rate structure means I bonds can provide returns that keep pace with rising prices.

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Like EE bonds, the minimum purchase is $25, and the annual purchase limit is $10,000 per person per year through Treasury Direct. I bonds are also purchased at face value, meaning you pay $100 for a $100 bond. There is an additional way to purchase up to $5,000 more in I bonds per year using your federal tax refund, which can increase your total annual purchase to $15,000.

The fixed rate on I bonds is announced by the Treasury every six months and applies to all bonds purchased during that period. This rate stays constant for the entire 30-year life of the bond. The inflation rate, meanwhile, is based on the Consumer Price Index for All Urban Consumers (CPI-U), an official government measure of inflation. The Treasury calculates this rate every six months and applies it to all bonds, regardless of when they were purchased.

The total interest rate of an I bond is found by combining the fixed rate and the inflation rate. For example, if the fixed rate is 1.0% and the inflation rate is 2.5%, your I bond would earn 3.5% interest that period. However, if deflation occurs (prices fall), the inflation component can become negative. The Treasury has a rule that protects the fixed rate: your total earnings cannot fall below the fixed rate alone. So if you have a 1.0% fixed rate and negative inflation of -2.0%, your bond still earns at least the 1.0% fixed rate.

I bonds have a one-year holding requirement before any redemption is allowed, and a five-year penalty applies if you redeem within five years. If you redeem before five years, you lose the last three months of interest. After five years, you can cash in your bond anytime without penalty. I bonds continue earning interest for 30 years.

Practical Takeaway: Series I bonds combine a fixed interest rate with a variable inflation rate that adjusts every six months. They're designed for people concerned about inflation eroding their savings and offer inflation protection that Series EE bonds do not.

Tax Treatment and Educational Benefits

The interest earned on US Savings Bonds is subject to federal income tax, but not to state or local income tax. This is different from many municipal bonds, which can be tax-free at multiple levels. You have a choice about when to pay taxes on your savings bond interest. You can pay taxes annually as the interest accrues, or you can wait and pay all the accumulated interest taxes when you redeem the bond. Most people choose to defer paying taxes until redemption, which allows the money to compound longer.

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When you redeem a savings bond and owe federal income tax on the interest, you'll report it on your Form 1040 federal tax return. The Treasury does not send you a Form 1099-INT automatically; you're responsible for tracking your interest earnings. However, when you redeem the bond, the Treasury will provide documentation showing the interest earned. Keeping good records of your purchase and redemption dates and amounts helps with accurate tax reporting.

There is a special education tax exclusion available for Series EE and Series I bonds. If you meet certain conditions, you can redeem your savings bonds and exclude all the interest from federal taxation if the proceeds are used for qualified education expenses. Qualified expenses include tuition and fees at an accredited college, university, or vocational school, as well as contributions to a qualified education savings plan (such as a 529 plan).

To use the education exclusion, you must meet several requirements. The bond must have been purchased in your name (or you must be listed as the owner), and you must be at least 24 years old when you purchase the bond.