What Is a Savings Bond?

A savings bond is an investment security issued by the U.S. Treasury. Savings bonds are ideal for people looking to save money over the long term.

Savings bonds get more attention in inflationary environments. Since record inflation has reared its head at the tail end of the pandemic, more people are considering saving bonds as a way to build and preserve wealth. 

Essentially, savings bonds are low-risk investments for those who don't mind forgoing the possibility of higher returns in exchange for a little more safety and security when markets are volatile and inflation is hot. Plus, there are certain tax benefits you may be eligible for with savings bonds. 

If you’d like to learn more about savings bonds as an investment strategy, we'll go over what they are, how they work and how you might use them to save, invest and preserve wealth.

What is a savings bond?

A savings bond is an investment instrument sold by the United States government. It helps individuals save money over time and earn interest while helping to fund the federal government’s treasury. You can buy savings bonds for sums between $25 and $10,000 per year.  

There are two types of bonds: Series EE Bonds and Series I Bonds. Both types of bonds accrue interest for up to 30 years before they reach maturity and have different payment options. 

Why should you get a savings bond? 

There are a few reasons you’d invest in savings bonds. For example, a savings bonds is a low-risk investment option. If you are worried about losing capital in volatile stocks or cryptocurrencies, then a savings bond is a great way to protect your investments.  

Another reason to invest in a bond would be to hedge against inflation. With the Series I bonds, you earn both a fixed rate of interest and a rate that changes with inflation. Twice a year, the U.S. The Treasury sets the inflation rate for the following six months. Series EE bonds are guaranteed to double in value over 20 years, according to the U.S. Treasury.

Savings bonds offer the security of guaranteed returns with high liquidity (easily converted to cash) and have the benefit of potential tax advantages, which can further maximize the return on your bond investments. 

Types of savings bonds

Here’s a little more information about the two types of bonds. 

Series EE Savings Bonds

• Fixed rate of interest: For bonds issued after 2005, the rate is set at the time of purchase and does not change for the life of the bond.The Treasury may adjust the rate or the way they earn interest after 20 years.
• Denominations: Available in denominations of $25 to $10,000.
• Interest payment: Accrues monthly, compounds semiannually and is paid when the bond is redeemed or when it reaches final maturity (30 years after the date of issue).
• Tax treatment: Subject to federal income tax; interest earned may be tax-free if used to pay for qualified education expenses; typically exempt from state and local taxes.
• Limitations: In any one calendar year for one Social Security number, you may only buy up to $10,000 in EE bonds.

Series I Savings Bonds

• Variable rate of interest: Based on the current rate of inflation. The interest rate is adjusted every six months and is compounded semi-annually.
• Denominations: Available in denominations of $25 to $10,000.
• Interest payment: Accrues monthly and is paid when the bond is redeemed or when it reaches final maturity (30 years after the date of issue).
• Tax treatment: Subject to federal income tax; may be tax-free if used to pay for qualified education expenses; typically exempt from state and local taxes.
• Limitations: In a calendar year, one Social Security Number or one Employer Identification Number (EIN) may buy up to $10,000 in electronic I bonds, and up to $5,000 in paper I bonds (with your tax refund).

Where can I get a savings bond?

You can purchase savings bonds online through TreasuryDirect.gov. They are also Savings available from authorized financial institutions or through payroll deduction plans offered by many employers. 

You can also purchase savings bonds with your income tax refund. You can use Form 8888, Allocation of Refund (Including Savings Bond Purchases) to inform the IRS of how you’d like to split up your refund between cash and savings bonds purchases. When you file your tax return, you can tell the IRS you want to save part or all of your refund and have the rest sent to your checking account.

How to cash in your savings bond

There are a few ways to redeem a savings bond. You can redeem them through an authorized financial institution or at  www.TreasuryDirect.gov. According to this website, here are the steps to follow:

1. Go to your TreasuryDirect account.
2. Go to ManageDirect.
3. Use the link for cashing securities.

You can cash any amount of $25 or more to the penny. If you cash only part of what a bond is worth, you must leave at least $25 in your account, plus you’ll only get the interest on the part you cash. Note, you’ll have the option to receive your funds via direct deposit or a check mailed to your address. 

Series EE bonds and I bonds must be at least one year old before you can redeem them. However, if you cash in the bond in less than five years, you lose the last three months of interest. For example, if you cash in the bond after 18 months, you’ll only get the first 15 months of interest. 

Savings bonds vs. savings accounts vs. certificates of deposit (CDs)

When deciding on the best savings vehicle for your goal, you should consider a few things:

• What kind of returns you are expecting.
• How soon you need your money.
• The amount and length of the financial commitment.

Savings accounts generally offer lower interest rates in exchange for easy access to your money. Ultimately, looking at all three options is important before deciding where to invest your money. 

By doing a little research, knowing your financial goals and understanding the risks and rewards with each option, you should be able to choose the best financial vehicle for your needs. 

How to gift a savings bond

You can give a savings bond as a gift by purchasing it in the recipient's name. To do this, you will need to provide the recipient's personal information, including their name, address, and social security number. You can purchase savings bonds at most financial institutions, such as banks or credit unions, or online through the Treasury Direct website. 

Savings bonds are back

For a long time, investors paid little attention to savings bonds, but recent economic circumstances have made savings bonds an attractive investment option offering guaranteed returns with low costs and the potential for certain tax advantages. Preserving wealth with savings bonds requires minimal effort but can yield respectable returns as part of a comprehensive financial strategy. Whether you're saving for retirement or something special, a savings bond can be an excellent way to reach your financial goals with minimal risk.

Frequently asked questions (FAQ)

How do savings bonds work?

Savings bonds are a type of investment bond issued by the U. S. Treasury. Essentially, you are lending the U.S. government your money for a guaranteed return after a certain period of years. The bond pays interest which is exempt from state and local taxes. You can redeem savings bonds at any time in exchange for cash.

What types of savings bonds are available?

There are two main types of savings bonds: Series EE bonds and Series I bonds. Both offer a guaranteed return on your investment, with Series EE bonds paying out a fixed rate of interest while Series I bonds pay a variable rate based on inflation.

Where can I purchase savings bonds?

You can purchase savings bonds directly from the US Treasury website or through authorized banks and financial institutions. 

Do savings bonds expire?

Series EE Bonds and Series I Bonds mature 30 years from the issue date. 

Do I need to report savings bond interest?

Yes, you must report any earnings from savings bond investments when filing taxes each year. You will receive form 1099-INT from the US Treasury for any interest earned in that year and should include this information when filing your tax return.

Why is the current bond series called EE and I?

The current series of savings bonds are called EE and I because they replaced the earlier E, H, HH and S series. The letter ‘E’ stands for “Enhanced” due to an increase in their interest rates, while the letter ‘I’ stands for Inflation-indexed.