A savings bond could be ideal if you want a low-risk way to grow your money. When you purchase this investment vehicle, you’re essentially lending money to the government in exchange for interest. Keep reading to learn more about how savings works, the key advantages and disadvantages they offer, and how to move forward with a purchase.
What are Savings Bonds?
Savings bonds are a type of debt security issued by the federal government. When you buy one, you essentially lend the government money and receive interest in return.
What are the Types of Savings Bonds in the U.S.?
There are two main types of savings bonds: Series EE and Series I.
Series EE Savings Bonds
Series EE savings bonds are issued at face value and earn a fixed rate of interest. They are designed to double value by maturity, which is 30 years, but you can redeem them after 20 years at their full value. And if you cash them in before five years, you forfeit the prior three months of interest earnings.
The current rate set by the U.S. Department of the Treasury is 2.70% for bonds issued between May 1, 2024 and Oct. 31, 2024.
Series I Savings Bonds
Series I savings bonds are also sold at face value but come with both a fixed rate and a variable rate that adjusts for inflation every six months. These bonds also mature in 30 years but must be held for at least one year before you can cash it in. Like Series EE savings bonds, you lose three months of interest if you cash them in between years one and five.
Comparison between Series EE and Series I
| Series EE Savings Bonds | Series I Savings Bonds | |
| Interest | Fixed | Fixed + Variable (adjusting semi-annually for inflation) |
| Minimum purchase amount | $25 | $25 |
| Annual purchase limit | $10,000 | $10,000 |
| Early redemption penalty | 3 months interest loss if cashed before 5 years | 3 months interest loss if cashed before 5 years |
| Purchase options | Electronic | Electronic and paper (with tax refund) |
How Savings Bonds Earn Interest
Interest for both Series EE and Series I bonds is calculated monthly.
For Series EE bonds, interest is compounded semi-annually. This means the interest you earn is added to your bond’s principal value, and future interest is calculated on this new amount.
For Series I bonds, the semiannual inflation rate adjustment means your bond’s interest rate can change twice a year. This keeps your savings in line with inflation rates, protecting your investment’s value.
Advantages and Disadvantages of Savings Bonds
Advantages
- Minimal risk: Savings bonds are a low-risk investment, as you won’t lose your principal and interest is guaranteed.
- Tax advantages: You won’t pay state or local taxes on interest earnings from savings bonds.
- Protects against inflation: Series I bonds adjust for inflation, so the value of your investment remains stable over time.
Disadvantages
- Long maturity period: You’ll have to wait up to 30 years to get the maximum value from your bond, and cashing it in between one and five years means you’ll lose the last three months of interest.
- Lower returns: Savings bonds generally offer lower returns than stocks and other investment options.
- Liquidity: You can’t quickly sell savings bonds on the open market – you must cash them in through the federal government.
Tax Benefits and Considerations
Keep these tax benefits in mind as you explore savings bonds.
Tax-Deferred Growth
You won’t pay federal income tax on interest earnings until the bond matures or you redeem it, whichever comes first. These bonds are also exempt from state or local taxes on interest, which could be quite beneficial in states with high-income tax rates.
Education Tax Exclusion
According to federal tax laws, the interest earned on EE and I bonds can be excluded from federal income taxes if used for qualified higher education expenses. This includes tuition and fees at eligible educational institutions.
To qualify for this exclusion, the bonds must be registered in your or your spouse’s name, and the expenses must be for you, your spouse, or a dependent.
There are income limits that apply to this benefit, which means high earners may not qualify. However, this can be a valuable way to save on college costs.
Reporting Interest for Tax Purposes
You can report the interest either annually as it accrues or defer it until you redeem the bonds or they mature. Most people choose to defer, simplifying their tax filings each year.
The interest from savings bonds is reported on Form 1099-INT, which you will receive from the Treasury when you cash in your bonds.
If you choose to report annually, you must continue to do so every year after that. Switching reporting methods can be complicated and may require IRS approval.
How to Purchase Savings Bonds
You can purchase savings bonds online or when you file your taxes.
Buying Online through TreasuryDirect
You can buy savings bonds online through TreasuryDirect. This is the most direct and convenient method.
First, you need to set up an account with TreasuryDirect. This requires basic information like your Social Security number or taxpayer identification number.
Once your account is set up, you can log in and purchase bonds. Payments are made electronically from your bank account.
Buying Paper Bonds
Paper savings bonds are not as commonly available as online bonds. However, you can still get them in specific cases, like through tax refunds. If you want to receive your bond as a paper bond, you’ll need to specify this when using your federal tax refund to purchase it.
Some financial institutions used to sell paper bonds, but this is no longer an option. The U.S. Department of the Treasury encourages online purchases due to their security and convenience.
Limits on Purchases
As previously mentioned, The U.S. Department of the Treasury has set limits on how much you can buy. The annual purchase limit for Series EE and I bonds is $10,000 per individual, per series, if buying online through TreasuryDirect. And up to $5,000 in paper bonds can be bought using your tax refund.
These limits apply to each person, so a married couple could collectively purchase up to $30,000 in savings bonds per year ($10,000 each for Series EE and I bonds online, plus $5,000 for paper bonds from a tax refund).
Redeeming Savings Bonds
Here’s what you need to know about redeeming your savings bonds.
When Can Bonds Be Redeemed?
You can redeem your savings bonds one year from the original purchase date. But since they earn interest for up to 30 years, it’s sensible to hold on to them for as long as possible.
How to Redeem Savings Bonds
If you have an electronic bond, you can start the redemption process through your TreasuryDirect account. But if you have a paper bond, you’ll need to visit a bank.
Penalties and Conditions for Early Redemption
A penalty of three months in interest applies if you cash in your savings bond before it reaches five years of age.
Comparison of Savings Bonds to Other Investment Options
Below is a breakdown of how savings bonds stack up to other investments:
- Stocks: They offer higher returns but are more risky and volatile.
- Mutual funds: They allow you to invest without managing individual assets and earn attractive returns, but they are also riskier.
- Real estate: Real estate requires more capital and hands-on asset management than savings bonds, but your potential returns are far greater.
Conclusion: Should You Invest in Savings Bonds?
Savings bonds can be a good choice if you want a safe, stable investment. They are ideal for conservative investors who want a risk-free way to grow their money. Or you can give them as a gift to young savers. But if you seek higher returns or need more liquidity, it’s best to explore other options.
Frequently Asked Questions About Savings Bonds
If a paper bond is lost or destroyed, you can request a replacement through TreasuryDirect. An electronic bond will be offered, or you can request that your paper bond be cashed.
Yes, you can gift savings bonds or change the beneficiary to transfer them to another party.
Visit TreasuryDirect.gov to inquire about the value of your savings bond.
