Savings bonds are loans you make to the U.S. government that pay you back with interest

A savings bond is a debt security issued by the U.S. Treasury. When you buy one, you are lending money to the federal government. In return, the government promises to pay you back the amount you invested plus interest over a set period of time. The interest rate and how long you hold the bond depend on which type you choose.

Savings bonds are different from stocks or mutual funds. You are not buying a piece of a company or a diversified portfolio. You are making a direct loan to the government, which is why they are considered one of the safest investments available — the U.S. government has never defaulted on its debt.

The two types of savings bonds available to individual buyers are Series EE bonds and Series I bonds. Each works differently and suits different financial situations.

Key Takeaways

  • Savings bonds are loans to the U.S. government that may provide repayment of your principal plus interest, making them one of the lowest-risk investments.
  • Series EE bonds earn a fixed interest rate set by the Treasury and double in value over 20 years if held that long.
  • Series I bonds earn interest that adjusts every six months based on inflation, protecting your purchasing power in rising-price environments.
  • You must hold a savings bond for at least one year before cashing it in, and you lose the last three months of interest if you cash it before five years.
  • Savings bonds can be purchased through TreasuryDirect, the official government website, in amounts as small as $25.

How Series EE Bonds work

Series EE bonds pay a fixed interest rate that the Treasury sets every six months. Once you buy the bond, your rate stays the same for the life of the bond. The Treasury announces the new rate on the first business day of May and November each year.

The current Series EE rate applies to all bonds purchased during that six-month period. If you buy a bond in May when the rate is 2.10%, that bond will earn 2.10% annually for as long as you own it. A bond purchased in November at a different rate will earn that rate instead.

Series EE bonds have a 20-year maturity period. If you hold the bond for the full 20 years, the Treasury guarantees it will at least double in value, even if interest rates fall below the purchase price. This may provide is unique to Series EE bonds and provides a floor on your return.

You can hold a Series EE bond for up to 30 years total, though the doubling may provide only applies to the first 20 years. After 30 years, the bond stops earning interest.

How Series I Bonds work

Series I bonds are designed to protect you against inflation. The interest rate on an I bond has two parts: a fixed rate and an inflation rate. The fixed rate never changes for the life of the bond. The inflation rate adjusts every six months based on the Consumer Price Index (CPI), which measures how fast prices are rising.

The Treasury announces new inflation rates on the first business day of May and November. If inflation is high, your I bond earns more. If inflation is low or negative, your bond still earns at least the fixed rate — it will not lose money. This makes I bonds useful when you are concerned about rising prices eroding your savings.

For example, if an I bond has a fixed rate of 1.06% and the inflation rate is 2.40%, you earn a combined rate of 3.46% for that six-month period. Six months later, the inflation rate might change to 1.80%, so your new combined rate becomes 2.86%. The fixed portion stays 1.06% forever.

Series I bonds mature after 30 years. Like Series EE bonds, you must hold them for at least one year before cashing in, and you lose the last three months of interest if you cash in before five years.

When you can access your money

Savings bonds have holding period restrictions. You cannot cash in a bond during the first year you own it, no matter which type. This is a hard rule with no exceptions.

If you cash in a bond between one and five years after purchase, you lose the last three months of interest as a penalty. For example, if you bought a bond 18 months ago and cash it in today, you receive the value as of 15 months ago, not 18 months.

After five years, you can cash in your bond anytime without losing interest. There is no penalty for holding longer than five years — you simply receive the full value accumulated to that point.

You cash in savings bonds through TreasuryDirect, the official government website where you bought them. The money is deposited directly into your bank account within a few business days.

Where to buy savings bonds and how much they cost

Savings bonds are sold only through TreasuryDirect (treasurydirect.gov), the U.S. Treasury's official website. You cannot buy them through a bank, broker, or investment app. You must create a TreasuryDirect account, which requires a Social Security number and a U.S. bank account for deposits and withdrawals.

You can purchase bonds in amounts as small as $25 and up to $10,000 per bond type per calendar year. If you want to invest more than $10,000 in Series EE bonds, you can buy up to an additional $5,000 in paper bonds using your tax refund, but this option is less common.

Bonds are purchased at face value. A $100 Series EE bond costs $100. A $100 Series I bond also costs $100. You do not pay a commission or fee to buy through TreasuryDirect.

Tax treatment of savings bond interest

Interest earned on savings bonds is subject to federal income tax, but not state or local income tax. You do not pay tax on the interest each year as it accrues — you pay tax only when you cash in the bond or it matures.

This tax deferral can be useful for long-term savings. If you buy a Series EE bond and hold it for 20 years, you do not owe federal tax on the interest until you cash it in. This allows your money to compound without annual tax drag.

There is one exception: if you use savings bond proceeds to pay for may have access to education expenses (tuition and fees at an accredited college or university), you may be able to exclude the interest from your taxable income. This benefit has income limits and other conditions, so consult a tax professional if you think you may have access to.

Savings bonds versus other low-risk investments

Savings bonds are one option among several for conservative investors. High-yield savings accounts at banks currently offer interest rates that are often higher than Series EE bonds, but that rate can change at any time. Savings bonds lock in your rate (for Series EE) or may provide a floor (for Series I), which some people prefer.

Money market accounts and certificates of deposit (CDs) also offer competitive rates and are FDIC-insured, meaning your principal is protected up to $250,000. Unlike savings bonds, you can access this money without a one-year waiting period, though some CDs charge penalties for early withdrawal.

Treasury bills, notes, and bonds (different from savings bonds) are also issued by the government and can be purchased through TreasuryDirect or a broker. They work differently and are often used by investors with larger amounts to invest.

Frequently Asked Questions

Can I lose money on a savings bond?

No. The U.S. government guarantees repayment of your principal. Series EE bonds are may provide to at least double over 20 years. Series I bonds cannot earn less than their fixed rate, so they will not lose value. Your only risk is that inflation rises faster than your I bond's combined rate, which reduces your purchasing power but not the dollar amount.

What happens if I need the money before one year?

You cannot cash in a savings bond during the first 12 months of ownership. If you think you might need the money sooner, a high-yield savings account or money market account is a better choice because you can withdraw anytime without penalty.

Should I buy Series EE or Series I bonds?

Series EE bonds work better if you expect low inflation or want a predictable rate. Series I bonds work better if you are worried about rising prices and want protection against inflation. Check the current rates on TreasuryDirect before deciding — sometimes one type offers significantly more than the other.

Do I have to report savings bonds on my taxes every year?

No. You report the interest only when you cash in the bond. However, if you use bond proceeds for education expenses, you may need to report that separately. A tax professional can advise you on your specific situation.

Can I transfer or gift a savings bond to someone else?

You can register a bond in someone else's name when you purchase it, or you can change the registration after purchase through TreasuryDirect. You cannot transfer an existing bond to another person's account, but you can name a beneficiary who inherits it if you pass away.