What Are U.S. Savings Bonds and How Do They Work
U.S. Savings Bonds are certificates issued by the U.S. Treasury Department that represent money you lend to the federal government. When you purchase a savings bond, you're essentially giving money to the government with the agreement that they'll pay you back with interest over time. The government uses this money to fund various operations, and in return, you earn money on your investment.
Get Your Free Guide to Paramount Plus on DirecTV →
There are two main types of savings bonds available today: Series EE bonds and Series I bonds. Series EE bonds earn a fixed rate of interest that stays the same for the entire life of the bond, currently set at 1.30% annually (as of May 2024). Series I bonds earn a combined rate consisting of a fixed portion plus a variable portion that adjusts every six months based on inflation. The current composite rate for Series I bonds is 5.27% annually, though this changes periodically.
When you purchase a savings bond, you don't receive a physical certificate in most cases. Instead, the Treasury maintains digital records through their TreasuryDirect website. You can purchase bonds online using your bank account or through payroll deductions if your employer offers this option. The minimum purchase amount is just $25, making savings bonds accessible to people with smaller amounts to invest.
Savings bonds have what's called a "final maturity date," which is typically 30 years from the purchase date. This means the bond will stop earning interest after 30 years. However, most savings bonds reach their "face value" (the amount you paid for them) much sooner. For example, a Series EE bond purchased for $50 will eventually be worth $100, though it takes about 20 years at current rates.
Practical Takeaway: Savings bonds are low-risk investments where you loan money to the U.S. government and receive regular interest payments. They're purchased digitally through TreasuryDirect, cost as little as $25, and offer either fixed or inflation-adjusted returns depending on which type you choose.
Understanding the Differences Between Series EE and Series I Bonds
Series EE bonds and Series I bonds serve different purposes depending on your financial situation and concerns. The main difference between them comes down to interest rates: Series EE bonds offer a fixed interest rate, while Series I bonds offer a variable rate tied to inflation.
Learn About Social Security Disability in Florida →
Series EE bonds are best for people who prefer predictability. When you purchase a Series EE bond today, you know exactly how much interest you'll earn each year for the life of the bond. This makes it easier to plan and predict how much your money will grow. Currently, Series EE bonds earn 1.30% annually. If you purchase a $50 Series EE bond, you'll earn about 65 cents per year in interest. After 20 years, your bond will reach face value ($100), and it will continue earning interest until it reaches final maturity at 30 years.
Series I bonds are designed for people worried about inflation eroding their savings. Inflation is when prices for goods and services increase over time, which reduces the purchasing power of money. Series I bonds protect against this by adjusting their interest rate every six months. The rate has two components: a fixed rate (currently 1.06%) that never changes, plus a variable rate that reflects current inflation. When inflation is high, your I bond earns more interest. In May 2024, I bonds earned 5.27% combined. When inflation drops, your rate will also drop, but it cannot go below the fixed rate portion.
There are important restrictions on when you can access your money with either bond type. You must hold a savings bond for at least one year before you can redeem it (cash it in). If you redeem it before five years have passed, you'll lose the last three months of interest as a penalty. After five years, you can redeem without this penalty. This makes savings bonds better for medium-term savings rather than emergency funds you might need quickly.
Practical Takeaway: Choose Series EE bonds if you want a predictable, fixed return. Choose Series I bonds if you're concerned about inflation and want your interest rate to adjust upward when prices rise. Both require a one-year holding period and impose a three-month interest penalty if redeemed before five years.
How to Purchase Savings Bonds Through TreasuryDirect
Purchasing U.S. Savings Bonds today is done almost exclusively through TreasuryDirect, which is the Treasury Department's online platform. This system has replaced the old method of buying paper bonds from banks, making the process entirely digital.
Free Guide to Understanding Mailed Refund Check Tracking →
To get started, visit TreasuryDirect.gov and create an account. You'll need to provide personal information including your Social Security number, date of birth, and valid email address. The Treasury uses this information to verify your identity and ensure that bond purchases comply with federal regulations. You'll also need to provide banking information—your account and routing number—since purchases are funded directly from your bank account.
Once your account is set up, the purchasing process is straightforward. You can buy bonds in amounts starting at $25, and you can purchase up to $10,000 in electronic bonds of each type (EE and I) per calendar year. This $10,000 annual limit applies per person per year. If you're married, each spouse can purchase $10,000 in Series EE bonds and $10,000 in Series I bonds annually, for a household total of $40,000.
When you purchase a bond, funds are withdrawn from your bank account within a few days. The bond begins accruing interest on the purchase date, and you can see your bond holdings anytime by logging into your TreasuryDirect account. The system shows you the current value of each bond, the interest earned to date, and when you became able to redeem it without penalties.
You can also set up automatic purchases through TreasuryDirect's EasySaver program. This allows the Treasury to withdraw a set amount from your bank account on a schedule you choose—for example, $50 every month—and automatically purchase bonds for you. This method can help you build a savings bond portfolio steadily over time without having to think about it repeatedly.
Some employers offer yet another option: payroll deduction purchases. If your employer partners with TreasuryDirect, you can authorize them to deduct a set amount from each paycheck and use that money to purchase bonds. This happens before you even receive your paycheck, which can make saving feel automatic and less painful.
Practical Takeaway: Create a TreasuryDirect account on the government's official website, link your bank account, and purchase bonds in $25 increments up to $10,000 per type per calendar year. You can make one-time purchases or set up automatic monthly purchases through EasySaver or your employer's payroll program.
Tax Treatment and Reporting Requirements for Savings Bonds
Understanding how savings bonds are taxed is important for your financial planning, especially if you hold multiple bonds over many years. The taxation of savings bonds is unique compared to many other investments.
Get Your Free Pop-Up Blocker Settings Guide →
Federal income tax is owed on the interest you earn from savings bonds, but you have flexibility in when you pay this tax. You can choose one of two methods: annual reporting or deferred reporting. Most people choose deferred reporting, which means you don't report the interest until you actually redeem (cash in) the bond or the bond reaches final maturity. This allows you to benefit from tax-deferred growth—your interest earns interest without immediate taxation.
When you finally redeem your bond or it matures, you'll report all the accumulated interest on your federal income tax return for that year. For example, if you hold a Series EE bond for 10 years and it earns $200 in total interest, you would report that $200 as income on your tax return in the year you cash in the bond. Your tax liability depends on your overall income and tax bracket.
State and local income taxes do not apply to savings bond interest. This is one advantage of savings bonds compared to many other investments—you only owe federal tax, not state tax. This makes them particularly attractive to residents of high-tax states.
There is one special tax benefit worth noting: the Education Savings Bond Program. If you use savings bond proceeds to pay for qualified education expenses in the same year you redeem the bonds, you may be able to exclude some or all of the interest from your taxable income.