Are savings bonds the right investment for you? Here’s everything you need to know about this financial strategy, including how it’s evolved over the last several years.

What is a savings bond?

A savings bond is a government-issued security that earns interest over a specified period of time. Backed by the full faith and credit of the U.S. government, it’s one of the safest investment options available and also features tax benefits, low minimum investments, and easy-to-purchase convenience.

As with any investment, however, savings bonds have their drawbacks too: including comparatively modest returns, longer required investment periods, and non-marketable status (meaning they can’t be transferred or sold to another investor, unlike marketable securities that can be bought and sold on secondary markets).

Types of savings bonds: Series EE and Series I

Series EE savings bonds are guaranteed to double in value over 20 years—offering a fixed rate of interest—with the U.S. Treasury making a one-time adjustment to ensure the promised return if the bond fails to do so within this period. These bonds continue to earn interest for up to 30 years and are only electronic, as a paper option is no longer offered.

Series I savings bonds, meanwhile, protect against inflation by combining a fixed interest rate with a variable inflation rate that adjusts semi-annually based on Consumer Price Index for All Urban Consumers (CPI-U) changes: a feature that makes Series I bonds particularly attractive during periods of rising inflation. You can buy both electronic and paper bonds in this case, with the latter only available to purchase with your IRS tax refund.

How do savings bonds work?

To understand how U.S. savings bonds work, we must first understand how they benefit not just the investor but the issuer as well (in this case, the U.S. government). By offering savings bonds, the government can achieve several economic and fiscal objectives.

First of all, individuals who purchase savings bonds are effectively lending money to the government; this borrowing mechanism provides a steady source of funding for various public expenditures spanning infrastructure projects, defense, education, and other essential services. Another primary government benefit is the relatively low borrowing cost, which translates to reduced interest expenses over time.

Savings bonds also provide the government with a stable and predictable source of funding. Unlike marketable securities (which can fluctuate in value and interest), savings bonds have fixed terms and interest rates. This stability helps the government plan and manage its budget more effectively, ensuring a consistent flow of funding for long-term projects and obligations.

Savings bonds also play a role in the government's broader economic strategy, including inflation control and monetary policy. By encouraging savings, the government can help reduce the amount of money in circulation as investors effectively set aside money they’d otherwise spend or invest in the broader economy: thus helping to mitigate inflationary pressures.

Finally, savings bonds support national interests by fostering a sense of patriotism and civic duty among citizens and have been historically marketed as a way for individuals to contribute to the nation's well-being. During times of national crisis (e.g., wars or economic recessions), the government has relied on savings bonds to raise funds quickly and efficiently. For example, during World War II, War Bonds (a precursor to modern savings bonds) were heavily promoted to finance the war effort.

How do savings bonds differ from traditional bonds?

All bonds help the issuing entity raise funds and the investor to potentially earn money via interest payments. While this applies to both savings and traditional bonds, many key differences distinguish the two as follows…

1. Issuer and backing

While savings bonds are exclusively issued by the U.S. government (providing unparalleled security), traditional bonds are issued by various entities including corporations, municipalities, and other governments. Traditional bond creditworthiness thus varies depending on the issuer, producing varying levels of risk.

2. Marketability

Since savings bonds are non-marketable, they must be held until they mature or are redeemed by the original owner—unlike traditional bonds, which can be bought and sold on secondary markets and thus allow investors to liquidate their positions (cash in the bond) prior to maturity.

3. Interest rates

Interest rates on new EE savings bonds won’t budge for at least 20 years, while rates on new I bonds can change every six months; either which way, however, interest accrues monthly and is compounded semiannually. What’s more, savings bond interest isn’t paid out periodically and is instead added to the bond's principal value and received when it is redeemed or matures. Traditional bonds can have fixed, variable, or floating interest rates, with their yields often influenced by market conditions and issuer creditworthiness.

4. Purchase and denomination

Savings bonds are typically bought at face value, with their $25 minimum investment amount ($50 for paper Series I bonds) making them incredibly accessible, while traditional bonds can be purchased at face value, at a premium, or at a discount—with investment amounts often requiring larger sums. Conversely, a savings bond investor is limited to a maximum annual savings bond purchase of $10,000; no such limits exist on traditional bonds.

5. Redemption and maturity

Savings bonds are designed for long-term investment, with interest accruing over periods typically ranging from 15 to 30 years. They can be redeemed after a minimum holding period of one year, although doing so within the first five years incurs a penalty of three months' interest. Traditional bonds have varying maturities ranging from short-term (a few months) to long-term (several decades) time periods, and investors can sell them on the secondary market at any time without penalty.

How to cash in savings bonds

Cashing in, or redeeming, savings bonds is a straightforward process that gives bondholders access to accumulated interest and principal (though electronic and paper bonds feature different redemption processes).

Those who purchase savings bonds through the TreasuryDirect website can redeem them online. Here’s how:

1. Log in to TreasuryDirect

Access your TreasuryDirect account by logging in with your credentials.

2. Navigate to ManageDirect

Once logged in, go to the ManageDirect tab where you can view your holdings and transactions.

3. Select bonds to redeem

Choose the specific savings bonds you want to cash in from your account holdings.

4. Follow redemption instructions

Follow the prompts to complete the redemption process, specifying the bank account where funds should be deposited.

5. Confirm the transaction

Review all transaction details, including the amount to be redeemed and bank account destination, before confirming redemption.

6. Receive funds

The redeemed amount, including the principal and any accrued interest, will be deposited into your designated bank account (typically within one to two business days).

While you can no longer purchase paper Series EE savings bonds, you can still redeem any paper savings bonds at a financial institution or mail a request for payment form to the U.S. Treasury. If you want to do so at a bank or credit union, all you’ll need is the savings bond and valid identification. Note you can request replacement bonds for any that are lost or stolen by submitting a Form FS 1048 to the U.S. Treasury.

To ensure compliance with tax laws and avoid penalties, it’s important to properly report interest earned on any redeemed savings bond. The U.S. Treasury will issue IRS Form 1099-INT to the bondholder, detailing the amount of interest earned, at the beginning of the year following redemption; the bondholder must then report this information on his/her federal income tax return.

Are savings bonds taxable?

A major benefit of savings bonds is their tax advantages, as interest earned is typically subject to federal income tax but exempt from state and local taxes—making them an attractive investment, particularly for individuals in states with high income taxes.

Additionally, interest earned on savings bonds is sometimes excluded from federal income tax if the proceeds are used to pay for qualified higher education expenses. This benefit, available under the Education Savings Bond program, can significantly reduce college costs. Individuals must meet several conditions to qualify for this tax exemption, however: only Series EE and Series I bonds issued after 1989 qualify, the bondholder must satisfy specific income limits, proceeds must be used for qualified higher education expenses (e.g., tuition and fees) at an eligible institution, bonds must be registered in the name of the bondholder, his/her spouse, or their dependents, and the bondholder must be at least 24 years old before the bond's issue date.

Savings bonds are sometimes also subject to tax considerations when gifted or inherited. When gifting savings bonds, donors may need to report interest earned up to the date of the gift—with the recipient then responsible for reporting any subsequent interest from the date of the gift to redemption or maturity. If savings bonds are included in an estate, interest earned up to the date of the owner's death is generally reported on the deceased’s final tax return or the estate's tax return (with the beneficiary who inherits the bonds reporting any interest earned after the date of death when the bonds are redeemed or mature).

Are savings bonds a good investment?

Few, if any, investments are inherently “good” or “bad.” Whether or not a savings bond is a good investment for you depends on various factors such as your financial goals, risk tolerance, and investment timeline.

As we’ve discussed, savings bond benefits include their low risk, predictable returns, accessibility, inflation protection (for Series I savings bonds), and tax benefits including exemption from state and local taxes and potential exemption from federal taxes if used for qualified education expenses. As with any investment, however, they also have their drawbacks including:

Lower returns

While savings bonds offer safety and predictability, returns are generally lower compared to other investment options such as stocks, mutual funds, or corporate bonds. They’re therefore perhaps not the most attractive choice for investors seeking higher returns with a willingness to take on more risk.

Limited liquidity

Savings bonds have a minimum holding period of one year during which they cannot be redeemed, after which a penalty equivalent to the last three months of interest is applied for redemption within the first five years. This lack of liquidity is sometimes a drawback for investors who need quick access to funds.

Interest rate risk

Although Series I bonds offer protection against inflation, Series EE bonds do not. If market interest rates rise significantly, fixed rates offered by Series EE bonds may become less attractive—leading to potential opportunity costs for investors.

The takeaway

Savings bonds are not an ideal investment for everyone, but their inclusion in some portfolios may help support long-term financial goals.

Want to know if a savings bond makes sense for you? Schedule a FREE discovery call with one of our CFP® professionals today.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.