What a savings bond actually is

A savings bond is a loan you make to the U.S. government. You give the government money now, they hold it for a set period, and they pay you back with interest when the bond matures. The government uses the money you lend to fund operations; you get a may provide return that doesn't depend on stock markets or bank performance.

The two types you can buy today are Series EE bonds and Series I bonds. EE bonds earn a fixed interest rate set when you buy them. I bonds earn interest in two parts: a fixed rate plus an inflation rate that changes every six months based on the Consumer Price Index. Both are backed by the full faith and credit of the U.S. government, meaning there is no risk of losing your principal.

Key Takeaways

  • You buy a savings bond from TreasuryDirect.gov for a set price, and the government pays you back with interest after a specific holding period.
  • Series EE bonds have a fixed interest rate; Series I bonds combine a fixed rate with an inflation adjustment that changes twice a year.
  • You cannot cash in a bond for one year after purchase, and cashing it in before five years means you lose the last three months of interest.
  • Bonds continue earning interest for 30 years, but you can hold them longer if you choose not to cash them in.
  • Interest on savings bonds is not taxed by states or localities, and you can delay federal taxes until you cash the bond in.

How you buy a bond and what it costs

You purchase savings bonds directly from the U.S. Department of the Treasury through TreasuryDirect.gov. You cannot buy them through a bank or broker. You need a Social Security number, a valid email address, and a bank account for electronic transfers.

Series EE bonds are sold at half their face value. If you want a $100 bond, you pay $50. Series I bonds are sold at face value—you pay $50 for a $50 bond. You can buy bonds in amounts from $25 to $10,000 per calendar year for each type. The interest is added to the bond's value; you do not receive payments while holding it.

When you can cash in a bond and what penalties apply

You must hold a savings bond for at least one year before you can cash it in. If you cash it in before five years have passed, you lose the last three months of interest as a penalty. After five years, you can cash it in without penalty at any time.

You cash in a bond through TreasuryDirect by requesting a redemption. The money goes directly to your bank account, usually within a few business days. The bond stops earning interest on the day you redeem it.

How interest is calculated and when you receive it

Series EE bonds earn interest at a fixed rate announced by the Treasury every six months. The rate applies to all bonds purchased during that six-month period. Interest compounds semiannually, meaning the interest earned gets added to the bond's value, and future interest is calculated on that larger amount.

Series I bonds earn interest in two parts. The fixed rate is set when you buy the bond and never changes. The inflation rate is announced every May and November based on the Consumer Price Index and applies to all I bonds held during that six-month period. The two rates are combined to create your total earnings rate for that period. I bonds are particularly useful when inflation is high because your earnings rate rises with it.

You do not receive interest payments while holding the bond. All interest stays in the bond and increases its value. When you cash it in, you receive the full value including all accumulated interest.

How taxes work on savings bond interest

Interest earned on savings bonds is not subject to state or local income tax—only federal tax applies. You have a choice about when to pay federal tax: you can pay it each year as interest accrues, or you can wait and pay it all when you cash in the bond. Most people wait until redemption because it is simpler and delays the tax bill.

If you use the bond proceeds to pay for may have access to education expenses—tuition and fees at an accredited college, university, or vocational school—you may be able to exclude the interest from federal taxes entirely. This is called the Education Savings Bond Program. There are income limits and other rules, so check the Treasury website to see if you may have access to.

How long bonds earn interest and what happens if you hold them past maturity

Savings bonds earn interest for 30 years from the date of purchase. This is called the final maturity date. After 30 years, the bond stops earning interest, but you can still hold it and cash it in at any time. There is no penalty for holding it past maturity.

If you forget to cash in a bond after 30 years, it still has value equal to the principal plus all interest earned. You can cash it in whenever you remember, though you will not earn any additional interest beyond the 30-year mark.

Comparing Series EE and Series I bonds

Choose a Series EE bond if you want predictability. You know exactly what interest rate you will earn for the life of the bond, which makes it easier to plan. EE bonds are also may provide to double in value within 20 years if held that long, even if interest rates fall below the purchase rate.

Choose a Series I bond if you are concerned about inflation eroding your savings. Because the interest rate adjusts every six months to match inflation, your purchasing power is protected. I bonds are especially attractive when inflation is elevated, though the rate can fall if inflation drops.

Both bonds are equally safe and backed by the government. The choice comes down to whether you want a fixed return or inflation protection.

Frequently Asked Questions

Can I lose money on a savings bond?

No. Your principal is may provide by the U.S. government. You will always get back at least what you paid, plus interest. The only way to receive less is if you cash in before five years and lose the last three months of interest, but you still get your principal back.

What happens if I need the money before one year?

You cannot cash in a savings bond during the first year. You must wait at least 12 months from the purchase date. If you need access to money sooner, a savings bond is not the right tool—consider a high-yield savings account instead.

Can I buy savings bonds for someone else as a gift?

Yes. You can purchase a bond and register it in someone else's name through TreasuryDirect. The recipient becomes the owner and can cash it in after one year. This is a common way to give a long-term savings gift to children or grandchildren.

Do I have to report the interest each year on my taxes?

Only if you choose to report it annually. Most people defer all taxes until they cash in the bond. If you do report interest each year, you must continue doing so for that bond. Consult a tax professional about which approach makes sense for your situation.

What is the difference between a savings bond and a Treasury bill or Treasury note?

Savings bonds are designed for individual savers and cannot be sold or transferred. Treasury bills, notes, and bonds are sold in larger amounts and can be bought and sold on the secondary market. Savings bonds are simpler and require no broker; they are meant to be held to maturity.