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, and they promise to pay you back that money plus interest at a set date in the future. You do not own a piece of property or a company — you own a debt that the government owes you, and that debt earns money over time.

The government issues bonds to raise cash for operations. In exchange, they may provide to return your principal (the amount you invested) and pay you interest. That interest is the cost of borrowing from you instead of from a bank. The longer you agree to lend the money, the higher the interest rate typically is, because you are giving up access to that cash for a longer period.

Savings bonds are different from stocks or mutual funds because there is no market risk — the government will not go bankrupt and refuse to pay you. The trade-off is that your returns are lower and fixed in advance. You know exactly what you will receive on the maturity date.

Key Takeaways

  • You purchase a savings bond for a set price and receive a may provide return on a specific maturity date, with no market risk.
  • 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 at maturity.
  • Series I bonds pay interest that adjusts every six months based on inflation, protecting your purchasing power in rising-price environments.
  • Interest on savings bonds is exempt from state and local taxes, though you owe federal income tax when you cash the bond.
  • You cannot cash most savings bonds for at least one year, and you lose the last three months of interest if you cash before five years.

How Series EE bonds work

A Series EE bond is the most common type sold to individuals. You purchase it at half its face value — meaning you pay $50 and receive a bond with a $100 face value. The bond earns a fixed interest rate set by the Treasury Department, which changes every six months but stays the same for your bond once you buy it.

The government guarantees that your Series EE bond will at least double in value by the time it reaches final maturity, which is 30 years from the purchase date. If the fixed interest rate does not achieve that doubling on its own, the government adds the difference as a one-time adjustment at the 30-year mark. This may provide means you cannot lose money on a Series EE bond if you hold it to maturity.

You can cash a Series EE bond anytime after one year of ownership. If you cash it before five years have passed, you forfeit the last three months of interest as a penalty. After five years, you can cash it without penalty and receive your principal plus all interest earned to that point.

How Series I bonds protect against inflation

A Series I bond works differently because its interest rate changes. You pay the full face value (a $100 I bond costs $100), and the interest rate adjusts every six months based on inflation data. The rate has two parts: a fixed rate that never changes, and an inflation rate that moves up or down based on the Consumer Price Index.

When inflation is high, your I bond earns more interest. When inflation drops, your rate drops too — but it never goes below zero. This means I bonds protect your purchasing power in a way that fixed-rate bonds do not. If you are concerned that inflation will erode the value of your savings, I bonds are designed to keep pace with rising prices.

Like Series EE bonds, I bonds cannot be cashed for one year, and you lose three months of interest if you cash before five years. The interest rate adjusts on May 1 and November 1 each year, so the timing of when you buy affects when your rate changes.

Tax treatment and when interest is reported

Interest on savings bonds is subject to federal income tax, but you have control over when you pay it. You can choose to report the interest each year as it accrues, or you can wait and report all the interest when you finally cash the bond. Most people wait until redemption because it delays the tax bill.

Savings bond interest is exempt from state and local income taxes, which is a real advantage if you live in a high-tax state. This exemption applies regardless of whether you report the interest annually or at redemption. When you cash the bond, you will receive a Form 1099-INT showing the total interest earned, which you report on your federal tax return.

If you use savings bond proceeds 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 your taxable income entirely. This requires meeting specific conditions and using the bond proceeds in the same year as the education expense.

Where to buy and how to hold them

You can purchase savings bonds directly from the U.S. Treasury through TreasuryDirect.gov. You need an account, a Social Security number, and a bank account for electronic transfers. You can buy bonds in denominations from $25 to $10,000 per bond type per calendar year, though you can purchase multiple bonds up to the annual limit.

Bonds are held electronically in your TreasuryDirect account — there are no physical certificates unless you request them. Electronic holding is simpler because you do not have to worry about losing or damaging the bond, and you can check your balance and interest accrual online anytime.

You can also purchase savings bonds through most banks and brokers, though they typically charge a fee and may have higher minimum purchases. TreasuryDirect has no fees and no minimums beyond the $25 per bond, so it is usually the cheapest route for individual buyers.

What happens when a bond matures

When a Series EE bond reaches its 30-year final maturity date, it stops earning interest. At that point, you must cash it or it sits in your account earning nothing. The government will not automatically deposit the money into your bank account — you have to initiate the redemption through TreasuryDirect or your bank.

Series I bonds have a 30-year final maturity as well, though they continue to earn interest throughout that period. Once a bond reaches final maturity, it no longer earns anything, so cashing it becomes necessary if you want to put that money to work elsewhere.

If you inherit savings bonds or receive them as a gift, you can hold them in your own name and they continue to earn interest on their original purchase date schedule. The maturity date does not reset — it stays based on when the original owner bought the bond.

Reasons to hold savings bonds versus other investments

Savings bonds make sense if you want may provide returns with no risk of losing principal. You cannot say that about stocks, mutual funds, or even high-yield savings accounts, which can change rates or fail. The trade-off is that bond returns are lower than what you might earn in the stock market over long periods.

Series I bonds are particularly useful during high-inflation periods because they adjust to keep pace with rising prices. If you are saving money you know you will not need for at least five years, I bonds can protect the purchasing power of that cash better than a regular savings account.

Series EE bonds work well for long-term savers who want a simple, set-it-and-forget-it investment. The doubling may provide means you know exactly what you will have at maturity, and the tax deferral option lets you control when you pay taxes on the gains.

Frequently Asked Questions

Can I cash a savings bond before maturity?

Yes, but with restrictions. You must wait at least one year from purchase. If you cash before five years have passed, you lose the last three months of interest as a penalty. After five years, you can cash anytime without penalty and receive your full balance plus all interest earned.

What is the difference between Series EE and Series I bonds?

Series EE bonds have a fixed interest rate and are purchased at half face value (you pay $50 for a $100 bond). Series I bonds are purchased at full face value and have an interest rate that adjusts every six months based on inflation. Choose EE for simplicity and a may provide doubling; choose I if you want inflation protection.

Do I have to report the interest every year?

No. You can defer reporting interest until you cash the bond, which delays your tax bill. Alternatively, you can choose to report interest annually. Once you pick one method, you must stick with it for that bond. The interest is always subject to federal income tax, but it is exempt from state and local taxes.

What happens if I lose my savings bond?

If your bond is held electronically through TreasuryDirect, it cannot be lost — it exists only in your online account. If you have a physical certificate, you can request a replacement through TreasuryDirect by providing proof of ownership. Electronic holding is why most people now buy bonds directly from the Treasury.

Can I buy savings bonds for someone else?

Yes. You can purchase a bond in someone else's name as a gift through TreasuryDirect, or you can buy one in your name and transfer it to them later. If you buy it in their name from the start, they own it and control when it is cashed. Bonds held in a minor's name require a parent or guardian to manage the account.