Savings bonds are a low-risk way to lend money to the U.S. government, but they return less than many other investments and lock your money away for years

A savings bond is a debt security issued by the U.S. Treasury. You give the government money upfront, they pay you back with interest after a set period. The appeal is straightforward: no stock market risk, no fees, and the full backing of the federal government. The trade-off is equally clear: the interest rates are usually lower than you could earn elsewhere, and your money is stuck until the bond matures or you pay a penalty to cash it early.

Whether savings bonds make sense depends on what you're trying to do with the money and what other options are available to you right now. If you have a specific goal five or ten years away and want zero risk, they work. If you're looking for growth or need access to your cash, they probably don't.

Key Takeaways

  • Savings bonds come in two main types: Series EE bonds (which double in value over 20 years) and Series I bonds (which adjust for inflation monthly).
  • You must hold a savings bond for at least one year, and you lose the last three months of interest if you cash it before five years.
  • Current interest rates on savings bonds are set by the Treasury and change every six months; they are typically lower than high-yield savings accounts or short-term CDs.
  • Savings bonds are backed by the U.S. government, so there is no default risk, but this safety comes with lower returns and reduced flexibility.
  • For most people saving for retirement or building wealth, a mix of stocks, bonds, and cash accounts will outpace savings bonds over time.

How the two types of savings bonds work

The Treasury sells two kinds of savings bonds to individuals. Series EE bonds are sold at half their face value—you pay $50 for a $100 bond—and are may provide to double in value over 20 years, no matter what interest rates do. If rates rise, the Treasury adjusts the rate upward. If rates fall, you still get the doubling may provide. You can hold them up to 30 years and earn interest the whole time.

Series I bonds are designed to protect against inflation. You pay full face value ($50 for a $50 bond), and the interest rate resets every six months based on inflation data. The rate has two parts: a fixed rate set when you buy, plus a variable inflation adjustment. When inflation is high, I bonds pay more. When inflation falls, the rate drops but never goes below zero. You earn whatever combination of fixed and variable rate applies during each six-month period you hold the bond.

Both types require you to hold them for at least one year. If you cash either type before five years, you forfeit the last three months of interest as a penalty. After five years, you can cash them without penalty and receive your principal plus all accrued interest.

Current interest rates and how they compare

The Treasury sets rates for new bonds every six months, in May and November. The rate you receive is locked in for the life of the bond (for EE bonds) or for the next six months (for I bonds). You cannot look up a single "current rate"—it depends on when you buy.

As of early 2024, Series EE bonds pay around 5% annually if held to maturity, and Series I bonds have paid between 4% and 5.27% depending on the inflation adjustment period. These numbers change, so check TreasuryDirect.gov before you buy to see the exact rate for new purchases.

For comparison, high-yield savings accounts at online banks currently pay 4% to 5.35% with no holding period and full access to your money. Money market accounts and certificates of deposit (CDs) with one- to five-year terms often pay similar or higher rates. The key difference: with a savings bond, your money is locked in, and you cannot access it without a penalty for the first five years. With a savings account or CD, you can usually withdraw whenever you want (though a CD charges a penalty if you break it early).

The tax treatment of savings bonds

Interest earned on savings bonds is subject to federal income tax but exempt from state and local taxes. You have two choices about when to pay the tax: you can report the interest each year as it accrues, or you can wait and pay all the tax when you cash the bond or it matures.

Most people choose to defer the tax until they cash the bond, which means you do not owe anything until you actually receive the money. This can be useful if you buy a bond in a year when your income is low and plan to cash it in a year when your income is also low—you may end up paying tax at a lower rate.

There is one exception: if you use a savings bond to pay for may have access to education expenses (tuition and fees at an accredited school), you may be able to exclude the interest from federal income tax entirely. This benefit phases out at higher income levels, so it is worth checking the IRS rules if education funding is your goal.

When savings bonds make sense

Savings bonds work best when you have a specific, distant goal and want to eliminate investment risk entirely. If you know you will not need money for ten years and want to may provide it will be there, an EE bond's doubling feature is appealing. If you are worried about inflation eroding your savings and want a may provide hedge, an I bond removes that worry.

They also make sense as a small part of a diversified portfolio—perhaps 5% to 10% of your savings—especially if you are already maxing out retirement accounts and high-yield savings. They are a place to park money you genuinely will not touch.

Savings bonds are less useful if you need the money within five years, if you want to build wealth over time, or if you are saving for retirement. For retirement, stocks and stock-heavy funds have historically returned much more over 20+ years, even accounting for volatility. For shorter time horizons, a high-yield savings account gives you the same safety with better access and often similar or better rates.

The downsides of locking money away

The biggest drawback is inflexibility. You cannot access your money for a full year without breaking the bond entirely. If you cash it between year one and year five, you lose three months of interest—a real cost if rates have risen and you are kicking yourself for not waiting. After five years, you can cash without penalty, but you still have to decide whether to hold longer or take your money out.

This matters more than it sounds. If you buy a bond at 5% and rates jump to 7% the next year, you are stuck earning 5% while new bonds pay 7%. You can cash the bond and reinvest, but you have already lost a year of higher returns. Over decades, this "opportunity cost" adds up.

Savings bonds also do not keep pace with stock market returns over long periods. From 1926 to 2023, stocks returned an average of about 10% per year (with volatility), while bonds returned about 5% to 6%. If you have 20 or 30 years until retirement, the difference between 5% and 8% or 10% is enormous.

How to buy savings bonds

You buy savings bonds directly from the U.S. Treasury through TreasuryDirect.gov. You create an account, link a bank account, and purchase bonds in denominations from $25 to $10,000. The bonds are held electronically—you do not receive a physical certificate. You can buy up to $10,000 per calendar year in each type (EE and I), so a maximum of $20,000 per year if you buy both.

You can also buy paper Series EE bonds through your bank or credit union, though this is less common now. Paper bonds are more cumbersome to track and redeem, so TreasuryDirect is the easier route.

To cash a bond, you log into TreasuryDirect, request the redemption, and the money is deposited into your linked bank account within a few business days. There are no fees.

Frequently Asked Questions

Can I lose money on a savings bond?

No. The U.S. government backs savings bonds, and you will always receive at least your principal back. Series EE bonds are may provide to double in 20 years. Series I bonds adjust for inflation, so your purchasing power is protected. The only way to lose money is if you cash before five years and forfeit three months of interest, but you still get your principal.

What happens if I need the money before five years?

You can cash the bond after holding it for one year, but you lose the last three months of interest. If you cash before one year, the bond cannot be redeemed at all. After five years, you can cash without any penalty. Plan to hold savings bonds only if you are confident you will not need the money for at least five years.

Are savings bonds better than a high-yield savings account?

Not usually. Both are safe and backed by the government (savings accounts are insured by the FDIC). High-yield savings accounts currently pay similar rates to savings bonds, but you can access your money anytime without penalty. The only advantage of a savings bond is if you want to force yourself not to touch the money, or if you are buying an I bond specifically to hedge against inflation.

Should I buy Series EE or Series I bonds?

Buy Series I bonds if you are concerned about inflation and want your interest rate to rise with prices. Buy Series EE bonds if you want a may provide doubling over 20 years and do not want to worry about inflation. If you are unsure, I bonds are the safer choice in an uncertain economic environment because they adjust automatically.

Can I use savings bonds for my child's education?

Yes. If you use Series EE or I bond interest to pay for may have access to education expenses, you may exclude that interest from federal income tax. The benefit phases out at higher income levels, and the bond must be registered in the parent's name, not the child's. Check the IRS website for current income limits before buying.