How Do Savings Bonds Work? Savings Bonds Explained

As a child, you may have received a savings bond as a gift and felt very annoyed when someone tried to explain to you what it was. Money that you can’t even use right away? That probably seemed pretty disappointing at the time. What’s exciting about $25 that you can’t touch for the next 20 years?

As an adult, however, the idea of a savings bond may not be so disappointing after all. These bonds are more than just monetary gifts you have to wait to cash in – they’re safe investments that earn interest over time.

What Is A Savings Bond?

Savings bonds are bonds issued by the U.S. Treasury that you can purchase either online or at a financial institution and redeem at a later date for their value plus interest. They’ve existed since 1935, when they were introduced by the government as a new type of security to promote saving vs. investing during the years of the Great Depression.

You can think of a savings bond as a small loan between yourself and the U.S. government where you are the lender. You give the federal government some amount of money right away – say $50 – and get a savings bond in return. If you hold onto that bond for 20 years, it might be worth $100 (or more) when you cash it in.

While there are many types of bonds that you can invest in, U.S. savings bonds differ from these traditional bonds in a few key ways:

How Do Savings Bonds Work?

A savings bond is a type of government bond that earns interest until you cash it in or up to its 30-year maturity limit. They’re not subject to state or local income taxes. And taxes on interest earned can be paid annually or deferred until the bond matures, making them a popular choice for investors.

Traditionally, you would buy a savings bond for a price lower than its “face value” ($25 for a $50 bond, for example) and then you would have to wait around 17 – 20 years for the bond to “mature,” or grow to its full value and stop accruing interest. Today, however, you can buy savings bonds in paper or electronic form for their face value and cash them in at any time after an initial 12-month period. They accrue interest until you cash them in or up to the 30-year maximum limit.

Types Of Savings Bonds

The U.S. Treasury currently offers two types of savings bonds: Series EE bonds and Series I bonds. Series EE bonds offer a fixed interest rate for the first 20 years, then the rate may adjust for the last 10 years. Series I bonds offer both a fixed rate and a rate that adjusts with inflation every 6 months, making them a good investment during periods of high inflation.

Here's a quick look at some of the key differences between Series EE bonds and Series I bonds:

Series EE Bonds

Series EE bonds (also sometimes called Patriot Bonds) have a fixed rate of interest, meaning that when you buy them, you’ll know the interest rate that they will earn throughout the life of the bond. EE Bonds purchased between November 2023 – April 2024, for example, will earn an annual fixed interest rate of 2.70%.

These bonds are guaranteed to at least double in value during the initial 20 years of their term. They’re subject to federal taxes, but only in the year you redeem them. Currently, these bonds can only be purchased electronically on the U.S. Treasury’s website.

Series I Bonds

Series I bonds accumulate value by combining a fixed rate with the rate of inflation. These bonds also earn two different rates of interest — a fixed rate that is set when you buy the bond and an inflation-adjusted rate that varies every 6 months. For bonds purchased between November 2023 and April 2024, you'll earn a fixed rate of 1.30% for the life of the bond and 3.97% based on inflation, for an initial interest rate of 5.27%. The inflation-adjusted interest portion of an I bond will vary twice a year.

Though these bonds are essentially “low-risk, low-reward,” their purpose is to save money that’s protected from inflation. You can buy them in paper or electronic format through the U.S. Treasury.

Pros And Cons Of Savings Bonds

Here are some of the pros and cons of savings bonds:

Pros

• Guaranteed returns: Unlike some other types of investments, the interest you earn with U.S. savings bonds is guaranteed by the full faith and credit of the federal government.
• Income tax advantages: Savings bonds are subject to federal income tax, but not state or local income tax.
• Liquidate after 5 years without penalty: While savings bonds continue to earn interest for 30 years, you can choose to sell them after 5 years without penalty.
• Inflation protection: Series I bonds offer some protection against inflation, because the interest rate changes every six months based on the current inflation rate.

Cons

• Can’t be cashed in for 1 year: You cannot cash out a bond for at least 1 year, and if you cash out before 5 years, you lose the last 3 months of interest.
• Yearly investing limit: You can only buy $10,000 per person electronically of each type of savings bond each year, though you can buy an additional $5,000 of paper I bonds as part of your tax return.
• Stops earning interest after 30 years: After 30 years, savings bonds stop earning interest. So if you got a savings bond as a kid, you might look at redeeming it before it stops earning any interest at all.
• Lower yields than other investments: While savings bonds are a guaranteed investment, the returns that they earn are lower than those of other types of higher-risk investments.

How To Buy Savings Bonds

Savings bonds are no longer sold at banks – so if you want to buy them, you’ll have to do so through the U.S. Treasury. You can purchase paper Series I bonds when you file your IRS tax return if you’d like paper bonds to give as gifts – otherwise, you can buy Series I and Series EE bonds on the U.S. TreasuryDirect website.

The minimum investment for electronic Series EE and I bonds is $25. If you choose to get a paper I bond, the minimum investment is $50.

Calculating Your Savings Bond’s Worth

Calculating how much your savings bond is worth depends on whether you have a paper or electronic savings bond:

How To Calculate The Value Of Paper Savings Bonds

If you have a paper Series EE or Series I bond, the U.S. government offers a paper savings bond calculator. To calculate the value of a paper savings bond using the calculator, you'll need to have the following information:

• Series type
• Denomination
• Bond serial number
• Issue date

The calculator can give you the value of your bond today, its value at various points in the future, the interest you've earned and other information about your paper savings bond.

How To Calculate The Value Of Electronic Savings Bonds

Calculating the value of electronic savings bonds is easier. For electronic savings bonds, you can simply log on to your TreasuryDirect account to see the value of every bond that is in your account.

How To Cash In Savings Bonds

Cashing in your savings bond is a fairly simple process. If you own electronic bonds, you can log into TreasuryDirect and follow the instructions for redeeming your bond. If you own a paper bond, you can cash it at most banks and financial institutions – you may want to call ahead before attempting to do so, however, to make sure that the place you intend to cash your bond still offers that service.

You can also cash your paper bonds directly through U.S. Treasury Retail Security Services. If you choose to go that route, you’ll need to fill out FS Form 1522 and mail the bonds and that form to Treasury Retail Securities Services, P.O. Box 9150, Minneapolis, MN 55480-9150.

Keep in mind that you must hold savings bonds for a minimum of 1 year before you’re able to cash them in. Additionally, if you cash them in before the first 5 years, you may lose the last 3 months of interest accrued. For example, if you redeem your savings bond after 18 months, you will only receive 15 months of interest.

Alternatives To Savings Bonds

If you decide that savings bonds are not the right investment product for you, here are a few alternative savings options to consider:

• High-yield savings accounts: A high-yield savings account is a savings account that offers a higher-than-average interest rate. High-yield savings accounts earn interest and are very liquid, meaning that you can access your money at any time.
• Certificates of deposit (CDs): CDs are offering some of the highest rates they've ever offered, due to rising interest rates. With a CD, you may get a higher rate than with a savings account, but you can't access your money without penalty for a certain period of time.
• Money market accounts: A money market account gives you some of the perks of a checking account while also acting as a savings fund. Money market accounts earn interest and, like savings accounts, allow you to access your money at any time.

FAQs On Savings Bonds

Still confused about savings bonds? Here are a few frequently asked questions to help clarify these bonds and what they do.

Are savings bonds worth the investment?

Whether anything is worth the investment is entirely up to you – but savings bonds, as far as investments go, are a pretty safe bet. They can help you protect some of your savings from inflation and can supplement your retirement income. However, bonds don’t bring in the same returns you could earn by investing in something riskier like the stock market. You probably shouldn’t rely on savings bonds alone when planning your retirement savings.

Do savings bonds accrue interest?

Savings bonds do accrue interest over time based on either a fixed annual interest rate or a fixed interest rate and rate of inflation, if you’re buying Series I bonds. Savings bonds earn interest for a period of 30 years from the time that you purchase the bond.

How long does it take a savings bond to mature?

To get the most out of a savings bond, you may wish to wait for it to “mature,” or reach its full promised monetary value. The maturation date of a savings bond is the day that the government, who you lent the money to, promises to pay you back double what you gave them originally. Maturation dates depend on when you purchased your bond, but they are usually anywhere from 17 – 20 years in the future. If you bought a $50 savings bond in November 2021, you could theoretically cash it out for $100 (potentially more, depending on interest earnings) in November 2041.

The Bottom Line: Savings Bonds Are A Low-Risk Way To Build Wealth

Savings bonds are a useful way to protect your earnings from inflation and set aside money to support your retirement. Though these investments are typically fairly low yield and low risk, they are an excellent way to diversify your financial portfolio and set yourself up for success.

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