Key Takeaways
- U.S. Savings Bonds currently pay interest rates between 4% and 5%, depending on the type and when you bought them, but this rate changes every six months.
- You cannot withdraw your money penalty-free until you have held the bond for at least one year, and you lose three months of interest if you cash it in before five years.
- For most homeowners, paying down a mortgage or building an emergency fund is a better use of money than buying bonds.
- Bonds are backed by the U.S. government, so they carry almost no risk of losing your principal, which is their main advantage.
- You buy bonds directly from TreasuryDirect.gov with no fees, and the interest is exempt from state and local income tax if you use the money for education.
How U.S. Savings Bonds Work
When you buy a U.S. Savings Bond, you are lending money to the federal government. In return, the government pays you interest over time. There are two main types: Series EE bonds and Series I bonds. Series EE bonds pay a fixed interest rate that never changes. Series I bonds pay a fixed rate plus an inflation rate that adjusts every six months based on the Consumer Price Index.
You buy bonds in amounts starting at $25 through TreasuryDirect.gov, the official U.S. Treasury website. There are no fees. The bonds are held electronically in your account, and you can view them anytime online. Interest accrues monthly and compounds semiannually, meaning you earn interest on your interest.
Bonds mature over time. Series EE bonds reach final maturity after 30 years, and Series I bonds after 30 years as well. You can hold them longer if you want, but they stop earning interest at maturity. Most people cash them in before that point.
Current Interest Rates and How They Change
Series EE bonds currently pay a fixed rate set by the Treasury Department. This rate changes every six months on May 1 and November 1, so the rate you get depends on when you buy. Series I bonds pay a composite rate made up of a fixed portion (which does not change for the life of the bond) plus a variable inflation rate that adjusts twice yearly.
Because rates change so often, the interest you earn on a bond bought today will differ from one bought six months from now. Before you buy, check TreasuryDirect.gov to see the current rates. Historically, Series EE rates have ranged from less than 1% to around 3.5%, while Series I rates have ranged from around 1% to over 9% in high-inflation years.
The inflation adjustment on Series I bonds is the main reason some people prefer them: if inflation rises, your interest rate rises with it. If inflation falls, your rate falls too, but it will never go below the fixed portion you locked in at purchase.
The Penalty for Cashing In Early
You cannot withdraw money from a bond penalty-free until you have owned it for at least one year. If you cash it in before one year, you lose all the interest you earned. That makes bonds a poor choice if you might need the money soon.
If you hold the bond for at least one year but less than five years, you lose the last three months of interest when you cash it in. This penalty shrinks the return you actually receive. For example, if you hold a bond for two years and then cash it in, you forfeit three months of interest, so you only keep 21 months of earnings.
After five years, you can cash in the bond with no penalty and keep all the interest earned. This is why five years is often called the "break-even" point for bonds—the penalty structure makes them much less attractive before that milestone.
Comparing Bonds to Other Uses of Your Money
For a homeowner, the question is not whether bonds are safe—they are—but whether they are the best place for your money. A high-yield savings account currently pays 4% to 5% with no penalty for withdrawal, which matches or beats bond rates and keeps your money liquid. A money market account offers similar rates with check-writing access. A short-term certificate of deposit (CD) might pay slightly more but also locks your money away.
If you have a mortgage, paying extra principal reduces the amount you owe and builds equity in your home. The interest rate on your mortgage is often higher than what bonds pay, so mathematically, paying down the mortgage gives you a better return. Plus, home equity is accessible through a home equity line of credit if you need it later.
If you do not have an emergency fund covering three to six months of expenses, that should come before bonds. An emergency fund in a high-yield savings account serves the same safety purpose as bonds but without the five-year lock-in.
When Bonds Make Sense for Homeowners
Bonds are worth considering if you have already built an emergency fund, paid off high-interest debt like credit cards, and have money left over that you genuinely will not need for five to ten years. They work well for long-term goals like funding a child's education (Series EE and I bonds have tax benefits if used for education expenses) or setting aside money for a future home repair or renovation you know is coming.
Bonds also appeal to people who want to "set it and forget it" without watching market fluctuations. Unlike stocks or stock mutual funds, bonds will not drop in value if the market falls. Your principal is may provide by the U.S. government. If you are risk-averse and have already met your other financial goals, that peace of mind may be worth accepting a lower return.
Another scenario: if you are in a high tax bracket and expect to be in a lower one in retirement, bonds can be tax-efficient because you can defer paying federal income tax on the interest until you cash them in. State and local taxes are waived entirely if you use the money for education.
How to Buy Bonds and Track Them
All U.S. Savings Bonds are sold through TreasuryDirect.gov. You create an account, link a bank account, and buy bonds electronically. There is no minimum purchase beyond the $25 per bond, and you can buy as many as you want. The bonds are held in your TreasuryDirect account and never arrive as paper certificates (though you can request paper bonds in certain circumstances).
Once you own bonds, you can log into TreasuryDirect anytime to see their current value, accrued interest, and maturity date. You can also set up a "SmartExchange" to automatically reinvest money from maturing bonds into new ones, though you have to do this manually each time a bond matures.
When you are ready to cash in a bond, you request it through TreasuryDirect, and the money is deposited into your linked bank account within a few business days. You will receive a 1099-INT form at tax time reporting the interest you earned.
Tax Considerations
Interest earned on U.S. Savings Bonds is subject to federal income tax, but not state or local income tax. You can choose to report the interest each year as it accrues, or you can wait and report it all at once when you cash in the bond. Most people defer reporting until they cash in, which delays the tax bill.
If you use Series EE or Series I bond proceeds to pay for may have access to education expenses—tuition, fees, books, or room and board at an accredited school—the interest may be tax-free. You have to meet income limits and other requirements, so check the IRS rules before counting on this benefit.
Frequently Asked Questions
Can I lose money on a U.S. Savings Bond?
No. Your principal is may provide by the U.S. government. The worst outcome is that you earn very little interest if rates are low when you buy, or you cash in early and forfeit some interest due to the penalty. But you will never get back less than you put in.
What is the difference between Series EE and Series I bonds?
Series EE bonds pay a fixed rate for the life of the bond. Series I bonds pay a fixed rate plus an inflation adjustment that changes every six months. If you think inflation will rise, Series I bonds protect you. If you prefer predictability, Series EE bonds are simpler.
Can I buy bonds for someone else, like a grandchild?
Yes. You can buy bonds as a gift through TreasuryDirect and register them in someone else's name. The recipient becomes the owner and can cash them in once they reach age 18 or whenever they choose. Bonds make popular gifts for children because they grow over time with no risk.
What happens if I need my money before five years?
You can cash in the bond anytime after holding it for one year, but you will lose the last three months of interest. If you cash in before one year, you lose all interest. This penalty makes bonds unsuitable if you might need the money sooner.
Do I have to report bond interest every year on my taxes?
You can choose either way. You can report interest each year as it accrues, or defer reporting until you cash in the bond. Most people defer to delay the tax bill. Either way, you will owe federal income tax on the interest when you eventually report it.