How Do Savings Bonds Work? Benefits, Risks and How To Cash
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Sean Dennison
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Emily Gadd
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A savings bond is an investment instrument offered by the federal government through financial institutions. When you buy a savings bond, you loan money to the U.S. government in exchange for a return at a future date.
Essentially, savings bonds are debt securities that fund U.S. government spending. They are considered one of the safest investments because the federal government guarantees them.
There are different types of savings bonds, however, and it’s important to understand which kind you are buying before you make an investment.
Learn:
How Savings Bonds Work
The amount you pay for a bond and your purchase price is the same as the face value of the savings bond. For example, you’ll pay $100 for a savings bond with a face value of $100. Over time, that value will increase.
An Example
Say you buy a Series EE bond for $100 that earns 2.60% interest per year, which is the rate until Apr. 30, 2025. One month’s worth of interest is added to the $100 principal amount each month.
After six months, the bond is worth $101.30. It earns interest on this principal amount for the next six months, after which the interest compounds again. However, interest on savings bonds is not paid out when it is earned. Rather, it is compounded and paid out at either maturity or when an owner redeems the bonds.
Types of Savings Bonds
Savings bonds currently come in two versions: Series EE and Series I. There are older series E and HH bonds in existence, but you can’t purchase them anymore. They can, however, still be redeemed, according to the U.S. Treasury.
Series EE andSeries I savings bonds earn interest for 30 years. The interest is added to the bond each month and compounds semi-annually.
Series HH bonds earned interest for only 20 years, and the last ones were issued in 2004. This means that as of 2025, all Series HH bonds have stopped earning interest and should be redeemed.
Here are more details about the two types of bonds.
| Bond Type | Face Value | Maximum Purchase | Interest Terms | Holding Period |
|---|---|---|---|---|
| Series EE | $25 minimum, one-cent increments thereafter | $10,000 | 2.60% annual fixed rate for bonds purchased until Apr. 30, 2025 | Up to 30 years; no penalty for cashing bonds after 5 years |
| Series I | $25 minimum, one-cent increments thereafter | $10,000 | 3.11% composite rate for bonds purchased until Apr. 30, 2025, with the fixed component set at 1.20% | Up to 30 years; no penalty for cashing bonds after 5 years |
Series EE bonds are generally good for conservative investors looking to earn a modest, guaranteed return. Series I bonds are better suited for investors concerned with how inflation erodes their purchasing power.
How Much Can You Invest in Savings Bonds?
Savings bonds are available in small denominations. Electronic bonds come with a face value between $25 and $10,000, and you can buy them down to the penny. For example, if you want to buy a Series EE bond for $76.49, you can.
Series I bonds are available in multiples of $50, from $50 to $5,000, with face values of $50, $100, $200, $500, and $1,000. Face value, also known as par value, is the amount that will be paid when the bond matures or comes due.
How To Buy Savings Bonds
To purchase a bond, you need a TreasuryDirect account, which also allows you to manage your bonds at your convenience. You’ll also need a valid Social Security number.
The process itself is simple. Just go to your TreasuryDirect account, choose “BuyDirect,” select Series EE or Series I bonds, and then enter the amount you want. You can buy up to $10,000 each of Series EE and Series I bonds, in amounts to the exact penny. According to TreasuryDirect, you can even buy a bond for, say, $75.38 if you so desire.
To find out exactly what your bonds are worth — or could be worth — check out the Savings Bond Calculator at TreasuryDirect.
Benefits of Savings Bonds
These are the main pros of investing in savings bonds:
- Low risk, as the federal government backs them
- Tax-advantaged, as they are exempt from state and local taxes*
- Guaranteed, easy-to-understand returns
- Series I bonds help protect against inflation
- Can be targeted to fund long-term goals, such as education or retirement
*Note that savings bonds may be subject to federal estate, gift and excise taxes, along with any state estate or inheritance taxes. The exemption is for federal income tax only, according to the U.S. Department of the Treasury.
Risks and Limitations of Savings Bonds
Although they have much to offer, savings bonds have three major drawbacks:
- Low returns compared to other investments like stocks or mutual funds
- Penalty for early redemption before 5 years
- Limited annual purchase amount
How To Redeem Savings Bonds
You can cash in savings bonds at your local bank or through the U.S. Department of the Treasury. Here are two ways to cash them:
- Paper Bonds: Present the bond and an acceptable form of identification to a bank. If you’re a beneficiary cashing the bond of a deceased person, you will also need a certified death certificate. Alternatively, you can complete FS Form 1522 and sign it at a bank for signature verification. Mail the form along with the unsigned bond to the U.S. Department of the Treasury.
- Electronic Savings Bonds: Log in to TreasuryDirect. Follow the onscreen steps for cashing a bond.
Although savings bonds earn interest on a continual basis, you don’t actually receive the money until they mature or you cash them in. At that point, the full amount of your interest becomes taxable. Note that you are allowed to pay tax every year that you earn the interest instead of paying it all in a lump sum at the end. However, this will involve paying tax on interest that you never physically receive. You might want to talk to your tax advisor to determine your best course of action.
Savings Bonds vs. Other Investment Options
Savings bonds share some similarities with traditional bonds, high-yield savings accounts and CDs, but they are actually quite different. Here are some of the main differences:
| Savings Bonds | Traditional Bonds | High-Yield Savings Accounts | CDs |
|---|---|---|---|
| Interest is paid upon maturity or redemption | Interest is paid at regular intervals, typically semi-annually | Interest is typically paid monthly | Interest is typically paid semi-annually |
| Bonds cannot be sold without penalty for the first five years | Bonds can be sold on the open market at any time | Money can be withdrawn at any time | Selling before maturity typically triggers an early redemption penalty of a few months interest |
| Interest is not taxable at the state or local level | Interest is typically fully taxable | Interest is typically fully taxable | Interest is typically fully taxable |
| Bonds are backed by the federal government | Bonds are backed by the guarantee of individual issuers, who may encounter financial difficulty | Backed by up to $250,000 in FDIC insurance | Backed by up to $250,000 in FDIC insurance |
| Owners can extend maturity after 20 years at their discretion | Bonds mature on a specific date unless permitted to be called earlier by the issuer; owners have no control over the maturity date | Completely liquid with no maturity date | Typically, they have set maturity dates of between a few months and a few years |
Savings accounts are much more liquid than savings bonds. You can withdraw money from your savings account at any time, often at an ATM. A savings bond, on the other hand, requires a transactional sale that may incur penalties if you sell it within the first five years after purchase. Savings account rates are variable vs. the fixed rates of savings bonds, but when rates trend high, they may pay a higher APY than savings bonds.
CDs are more similar to savings bonds in that they have fixed interest rates and maturity dates, with penalties for selling early. Savings bonds can be a better choice if you have a long-term investment horizon and want to avoid state tax.
Who Should Use Savings Bonds
Savings bonds aren’t the flashiest investment, but they offer something valuable: safety, simplicity and steady growth. Whether you’re just getting started or looking to balance your portfolio with a low-risk option, here’s who can benefit most from savings bonds:
Who Should Use Savings Bonds
- Risk-averse investors. If market volatility makes you uneasy, savings bonds provide a government-backed way to earn interest without the ups and downs of stocks or mutual funds.
- Long-term savers. Savings bonds are built for the long haul. EE bonds double in value after 20 years if held to maturity, and I bonds continue earning interest for up to 30 years, making them ideal for those with patience.
- People looking to protect against inflation. Series I bonds offer a variable interest rate that adjusts with inflation. When prices rise, your bond’s return rises too, helping you preserve your purchasing power over time.
- Parents saving for education. If you’re putting money aside for college, savings bonds may offer federal tax advantages when used for qualified education expenses–an added bonus for long-term planners.
- New investors or gift-givers. With low minimum purchase amounts and straightforward terms, savings bonds are a smart choice for beginners or anyone looking to give a child or grandchild a financial head start.
Are Savings Bonds Right for You?
Though savings bonds are low risk, they often provide a low return. However, if you’re looking for a government-guaranteed investment that pays interest, you may find comfort in owning savings bonds. They can make a good slow-growth investment for children, risk-averse investors or those new to investing.
Savings bonds are long-term, government-backed investments that can provide a guaranteed return. Although they generally pay low interest rates, their safety makes them a good choice for conservative or beginning investors, especially those with long-term goals like retirement or education.
Caitlyn Moorhead and John Csiszar contributed to the reporting for this article.
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- Investor.gov. "Savings Bonds."
