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9 Min. Read

How Do Savings Bonds Work: A Comprehensive Guide

How Do Savings Bonds Work

Savings bonds are the investment solution for conservative and balanced investors. Savings bonds are securities held by the U.S. government that provide investors with guaranteed long-term and low-risk returns.

Besides guaranteed returns, bonds offer tax advantages as well as some protection from inflation. Check out our guide to savings bonds below and start optimizing your portfolio.

Key Takeaways

  • Investing in savings bonds guarantees a long-term return from the U.S. government.
  • Federal taxes apply to savings bonds, but these investments are exempt from most state and local taxes.
  • Series EE bonds carry fixed rates, and Series I bonds have a fixed rate plus an adjustable rate based on the consumer price index.

Table of Contents

What Is a Savings Bond?

Savings bonds are securities that the U.S. government issues to help its funding needs. The government issues these savings bonds to citizens through the Treasury Department website. You can also opt to use all or part of your IRS tax refund to buy paper I bonds (minimum amount $50). When you buy U.S. savings bonds through either the Treasury or your IRS tax refund, you’re effectively lending money to the government in exchange for a return with interest when you later redeem your bond.

Turn Tax Pains Into Tax Gains

How Savings Bonds Work

Like traditional bonds, savings bonds pay interest on their returns. With a savings bond, however, interest accrues over time, compounds, and pays out the value when you redeem it rather than on a regular basis.

The government issues savings bonds at a discount that eventually mature to their full face value, and the interest rate is a fixed rate based on the original value of the bond. Only the owner can redeem U.S. savings bonds, and they’re not resellable. Savings bonds are subject to federal taxes either on interest earned each year or once they’re matured, but they’re exempt from state and local income taxes.

You can purchase electronic savings bonds in any amount between $25 and $10,000, and paper bonds in $50, $100, $500, and $1,000 denominations. You can’t buy more than $5,000 per year in paper savings bonds.

Types Of Savings Bonds

You can purchase two types of savings bonds from the U.S. Department of the Treasury. Although the government no longer sells certain historical bonds, you can still redeem them.

Series E Bonds

Once known as war bonds, Series E savings bonds were issued between 1935 and 1980 as a way to encourage Americans to save and make safe and accessible investments. Although the government no longer issues Series E bonds, you might have a few paper bonds hiding away and waiting to be redeemed. Any Series E savings bond issued after November 1965 earns interest for 30 years, and you can cash it in for its face value and any accrued interest.

Series EE Bonds

Series EE savings bonds replaced Series E bonds. These savings bonds earn interest monthly over 30 years or until you cash them, and they compound every 6 months. A series EE bond earns a fixed interest rate for the first 20 years and is guaranteed to double in value over this time, and the government may adjust this rate after this duration.

Series I Bonds

Series I savings bonds are an alternative to EE bonds. The government issues I bonds over a 30-year period, but they don’t come with a maturity guarantee to double in value. Instead, Series I bonds come with a fixed rate plus an inflation-adjusted interest rate that revises semiannually. They carry slightly more risk than EE bonds since low inflation rates could hurt their value over time, but the interest rate will never fall below 0%.

How Do Savings Bonds Accrue Interest

Traditional bonds earn and pay interest out monthly, but savings bonds don’t pay out until they’re matured or cashed out.

Savings bonds earn interest monthly, but the interest is compounded and added to your original value semiannually. As such, your interest rate applies to a higher principal every 6 months. Your bond’s value will continue to grow every 6 months over its first 20 years, after which the government may adjust the rate or the way your bond earns interest.

How To Cash In Savings Bonds

You can cash in both Series EE or Series I savings bonds once you’ve held them for 12 months. Keep in mind that you lose the last 3 months of interest if you cash a bond in less than 5 years.

With electronic bonds, you’re able to cash out all or a portion of the bond’s value. Cash-outs may equal $25 or more to the penny. If you only cash out a portion of the bond, you must leave at least $25 in your account. Cashing out a portion of the bond also means you only receive interest on the portion you redeem. To cash electronic bonds, visit your TreasuryDirect account and follow the link for cashing securities.

A paper bond must be cashed for its full value. Banks vary on how much they’ll cash out for savings bonds at a time and sometimes don’t cash them at all. The U.S. Department of the Treasury, however, doesn’t have any limits and allows you to mail in and cash paper bonds.

When Is a Savings Bond a Good Investment?

Since they’re backed and guaranteed by the government, savings bonds are generally considered among the safest types of investments. Although savings bonds carry lower return potential than the stock market, they are risk-free options for people who prefer safe investments and minimal volatility. They’re also guaranteed to earn interest over an extended period, which makes them attractive for saving for long-term purchases.

Many investors also use bonds as a way to balance the risk of their investment portfolio. When the market is volatile and uncertain, savings bonds function as a stable option for your money to retain its value and adjust to inflation.

Pros and Cons of Savings Bonds

As with any investment, it’s important to consider the pros and cons of savings bonds and choose the option that best suits your financial goals.

Pros of Savings Bonds

  • Savings bonds issued by the U.S. government are guaranteed, making them a low-risk option
  • Only federal tax applies to savings bonds; they’re usually exempt from state and local taxes. For federal income tax, you can choose whether to report earnings each year or wait to report all the earnings when the bond finishes earning interest (or when you cash it if you cash it before the end of its 30-year life)
  • In some cases, you don’t have to pay tax on bonds used to pay for higher education
  • Series I bonds respond to changes in the consumer price index, providing some protection against inflation

Cons of Savings Bonds

  • Savings bonds are locked in for at least 1 year after issue and incur penalties if they’re redeemed in less than 5 years
  • Interest rates are lower than other investment products, so you won’t see high yields with savings bonds
  • $10,000 yearly cap on investment per type of bond
  • You must pay federal estate, gift, and excise taxes; state estate or inheritance taxes.

Alternatives To Savings Bonds

Although savings bonds carry numerous benefits, the right investment depends on your personal financial circumstances and strategy. If you’re interested in low-risk investments, fixed income, or a diversified portfolio, a number of investment alternatives can provide meaningful returns and protect your money from inflation. These include:

  • High-yield savings account: A liquid savings account that typically offers high interest rates as well as no monthly fees or minimum balance
  • REITs: Real estate investment trusts are highly liquid and allow you to get exposure to the real estate market, often for under $100 per share
  • Certificates of deposit: Offered by banks, CDs offer high fixed interest rates but come with various minimums and locked-in periods
  • Dividend stocks: Although they have higher volatility and are without a government guarantee, dividend stocks, ETFs, and mutual funds can provide payout and growth over time

FreshBooks: Your Tax Preparation Partner

Saving for your future and protecting the value of your money is as important as ever. With savings bonds and a smart investment strategy, you can make the most of your money. 

To get on top of your finances and get your investment portfolio in optimal shape, check out FreshBooks accounting software. Whether you’re trying to boost your savings or a small business navigating revenue and expenses, FreshBooks can help you categorize and track your finances.

Ready to get your investments in order? Try FreshBooks free today.

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FAQs About How Savings Bonds Work

Savings bonds and investments often prompt lots of questions about interest rates, yield potential, and more. Check out the top FAQs on savings bonds below.

How much is a $200 savings bond worth after 20 years?

A $200 bond, which you would have paid $100 for, is guaranteed to be valued at at least $200 after 20 years.

Will I bonds double in 20 years?

The Treasury guarantees that EE Series savings bonds double in value in 20 years, but I Series savings bonds don’t carry this same guarantee.

Are savings bonds worth it?

Savings bonds provide no risk, guaranteed yield, and tax advantages, making them a great option for cautious investors or those who want a diversified investment portfolio.

What happens to EE bonds after 30 years?

Series EE savings bonds mature at 30 years and stop earning interest, and the Treasury will pay you for the value of your electric EE bond at this time. If you have a paper EE bond, you’ll have to mail it to the Treasury for redemption or visit a bank that cashes savings bonds.

Can you lose money on a bond if you hold it until maturity?

Savings bonds issued by the government are guaranteed, so you can’t technically lose money. If your savings bond interest rate doesn’t match inflation, however, your return may be less than it would in higher-interest investment products.

Do savings bonds expire after 30 years?

Savings bonds mature and expire at 30 years, which means they stop gaining interest and should be redeemed.

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Sandra Habiger, CPA

About the author

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.