What Is a Savings Bond and How Does It Work?

Here's what you should know before you invest in a savings bond.

The name’s bond — savings bond. And though a savings bond might not be as exciting as 007 himself, with a bit of planning, savings bonds can yield double-0 figures — or more — in your bank account. Consumers prize savings bonds for their security and simplicity, but do those attributes make up for the modest returns they offer? What should investors consider before putting money into a bond?

To find out the answers to these questions, check out GOBankingRates’ guide on savings bonds, and see if there’s a place for them in your portfolio.

In this guide, you will learn:

What Is a Savings Bond?

In short, a savings bond is a debt instrument. Simple enough, but how do savings bonds work?

When you buy a savings bond, you are loaning money to the issuer: the U.S. government. Bonds are available in small denominations, with a face value between $25 and $10,000. Face value, also known as par value, is the amount that will be paid when the bond matures or comes due. A bond typically will not earn a very high return, however, because savings bonds lie at the conservative end of the investment spectrum.

Two types of savings bonds are available: Series EE bonds, which are traditional savings bonds, and Series I bonds, which carry an inflation-adjustment component.

Learn: How To Choose the Best Types of Bonds To Buy

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Types of Savings Bonds

The two main types of savings bonds are Series EE bonds and Series I bonds. The key difference between the two is in how rates are applied: Series EE bonds carry a fixed rate, whereas Series I bonds are affected by both a fixed rate and an inflation rate. Here are details on the bonds at a glance:

Types of Savings Bonds: Series EE and Series I
Series EE BondSeries I Bond
Rate0.10%1.90%
Paper or ElectronicElectronicBoth
Minimum Purchase$25Paper: $50
Electronic: $25
Maximum Purchase Per Year$10,000Paper: $5,000
Electronic: $10,000
Denominations$25 and above, in penny incrementsPaper: $50, $100, $200, $500, $1,000
Electronic: $25 and above, in penny increments
Term LengthUp to 30 years (one-year minimum ownership)Up to 30 years (one-year minimum ownership)
Rates are applied to bonds issued between May 2019 and October 2019.

Note that both bonds are “exempt from taxation by any state or political subdivision of a state, except for estate or inheritance taxes,” according to the Treasury Department’s Bureau of the Fiscal Service. However, both are subject to federal income tax for the savings bond owner. Both bonds stop earning interest after 30 years.

Series EE Bonds

The Series EE bond is probably more well known than its Series I counterpart. You purchase Series EE bonds at face value, but the Treasury Department guarantees that the bonds will at least double in value after 20 years. Say, for example, a Series EE bond has a face value of $100 and you buy it for $100. After two decades, that bond will be worth at least $200. However, the bond continues to earn interest after that period, for up to 30 years.

The current rate for Series EE bonds is 0.10%. Interest is added to the bond every month, but will only be available when the bond is cashed out. Keep in mind that cashing out the bond within five years of opening will result in the loss of three months’ interest. Cashing out after five years will not result in any sort of loss. Series EE bonds are only available for purchase in electronic form.

Series I Bonds

The Series I bond’s annual interest rate is based on both an annual fixed rate and an inflation rate that usually changes on a semiannual basis. These bonds provide some protection against inflation. They have a floor of 0% for returns, which means that even if the inflation rate is negative, the value of the bond will never go under what you paid for it. The current rate for a Series I bond is 1.90%.

Series I bonds can be purchased electronically, but there is also a paper option. Paper Series I bonds, however, can only be purchased through your tax return.

Other Bonds

Although Series EE and I bonds are the two most well-known types of savings bonds, other types of bonds do exist.

  • Series HH and Series H savings bonds: Series HH and Series H bonds have been discontinued by the Treasury Department; however, some Series HH bonds that have been issued in the past are continuing to pay interest. According to the Bureau of the Fiscal Service, “HH bonds are current-income securities. You paid face value and receive interest payments by direct deposit to your checking or savings account every six months until maturity or redemption.”
  • Treasury bonds: These bonds pay a fixed interest rate every six months, with a term of 30 years. This is useful if you’re looking for ongoing income while holding the bond. Once a treasury bond reaches its maturity date, the holder is paid the face value of the bond.
  • Corporate bonds: When you purchase a corporate bond, you are loaning money to the company that is offering the bond. Corporate bonds tend to offer higher interest rates than government bonds.

Check Out: The 10 Best Short-Term Investments for 2019

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Why People Buy Savings Bonds

A savings bond’s security — the financial backing of the U.S. government — can be an attractive sell to a cautious investor, especially when that investor has a lot of capital to invest in. A Series EE bond, with its guarantee of doubling your principal after 20 years, can be a big piece of assurance for your long-term financial plans. Imagine all your other investments tanking within 20 years but then receiving a gift in the form of a doubled return. And bonds are a fairly popular investment choice. A 2018 GOBankingRates survey found that 46% of respondents had their money invested in stocks and/or bonds.

“Savings bonds could be great savings tools, if they are for the right amount and help you meet your savings goals,” said Dawn-Marie Joseph, founder and president at Estate Planning & Preservation. “Before my children went to college, I used bonds as a tool to help save for their tuition. At the time they were paying 6%, and if they were used for education, I didn’t have to pay tax on the interest.”

While Joseph noted that rates change, and that current rates are low, Series EE bonds are “very popular for gifts, graduations, weddings, etc.” This is because most people buy them and forget about it, but the bond continues to grow.

Other Options: 13 Ways To Invest That Don’t Involve the Stock Market

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Are Savings Bonds a Good Investment?

The answer to that question depends on the type of investor you are. Typically, bonds have a low-risk, low-reward structure that would benefit patient investors or those with a clear long-term money strategy. From strictly a risk-taking standpoint, savings bonds are a great investment because of their backing from the Treasury Department. But that also forces investors to question how much of a return they demand from their investments. Those looking for more money might find more satisfaction in trading stocks or exchange-traded funds. And yet, it’s impossible to lose money from savings bonds through trading fees such as account maintenance and commission fees.

Benefits and Risks of a Savings Bond

The practicality of investing in a bond depends on the type of investor you are. People attracted to long-term security but low gain will find a savings bond to be a worthwhile investment.

Benefits:

  • Highly secure asset
  • A guaranteed return with Series EE bonds
  • Protection against inflation through Series I bonds
  • Exemption from state and local taxes
  • Can help bolster an investment portfolio in a turbulent market

Risks:

  • Low return unless investing with a sizable principal
  • Interest earned on bonds is still subject to federal income tax
  • Money may be inaccessible for emergencies
  • Cashing out earlier than five years into the bond reduces its value

Who Should Buy a Savings Bond?

People who are interested in investing in the future should buy savings bonds. That describes a pretty broad category of investors, so consider the following scenarios in which a savings bond would come in handy:

  • College: New parents might want to get a start on their children’s educational future by investing in just that. A $10,000 investment in a Series EE bond means the bondholder can transfer $20,000 to their child’s college fund once that bond matures, and just in time for the child to turn 20. This is also a great idea for taxpayers who qualify for the education tax exclusion. According to the Bureau of the Fiscal Service, qualified taxpayers can “exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE and I bonds issued after 1989.”
  • Retirement: Planning for a comfortable retirement is all about saving, and the earlier you start saving, the better. However, be mindful of any taxes you could owe on the bond.
  • Weddings: Whether you’re a parent or a singleton with nuptial goals, you can use a bond to start saving for the big day. One thing to note is that married couples can choose to file their tax returns jointly or separately, so couples might want to consult with a tax expert to see if a savings bond will impact their filing.

Also See: 9 Safe Investments With the Highest Returns in 2019

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How To Maximize Returns of Savings Bonds

Bonds are fairly straightforward, so it’s less about maximization — because bond returns are based on principal and being patient, the best way to maximize a return isn’t just to put a bunch of money into the bond. Rather, it’s more about minimizing actions that could lead to lost investments. AARP suggests avoiding these mistakes when cashing out bonds:

  • Cashing out the oldest bonds first
  • Cashing out so many bonds that the taxable interest affects your tax bracket
  • Redeeming a bond shortly before an interest payment is due

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How To Buy Savings Bonds

Both Series I and Series EE savings bonds can be purchased at TreasuryDirect. Note that you’ll need a TreasuryDirect account to make a purchase. You can also purchase savings bonds through TreasuryDirect’s payroll savings plan, wherein you can make recurring purchases of bonds from a portion of your paychecks.

As of 2012, you can no longer purchase paper bonds from financial institutions. Series I bonds can be purchased in paper form but only by using your tax refund. Series EE bonds are only available for purchase via TreasuryDirect, and they are no longer issued in paper form.

You pay face value for a savings bond and can designate the amount down to the penny. If you’re looking to purchase a bond as a gift, keep in mind the recipient needs a TreasuryDirect account, too.

How To Find Out What They’re Worth

If you’re good at math, you can probably just calculate your bond’s current value in your head. For mere mortals, the Bureau of the Fiscal Service provides bondholders a savings bond calculator online. To use the calculator, simply do the following:

  1. Select the series and denomination of your bond from the drop-down boxes.
  2. Enter the issue date of your bond. Enter two digits for the month and four digits for the year. If you need help finding the issue date or serial number on your paper bond, consult this savings bond diagram.

You can also use this tool to calculate a bond’s past or future value. The calculator also allows you to save your inventory so you won’t have to reenter your bonds every time you use it.

Nontraditional Ways To Invest: What Are Alternative Investments? 9 Options for Your Money

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How To Cash Savings Bonds

You can redeem electronic savings bonds by logging into TreasuryDirect. According to the TreasuryDirect website, once you redeem your EE bonds, “the cash amount can be credited to your checking or savings account within two business days of the redemption date.” Keep in mind you can only cash out after you hold the bond for one year.

Paper bonds can still be cashed out at most financial institutions, which is faster than redeeming them electronically. Additionally, you can cash paper bonds by mailing them to:

Treasury Retail Securities Services
PO Box 214
Minneapolis, MN 55480-0214

There are some special circumstances to be aware of for redeeming paper bonds:

  • Redeeming outside the U.S.: If you’re a U.S. citizen, you can redeem your bond at a branch of a bank that is incorporated into the U.S. or one of its territories, including Puerto Rico. If you’re not a U.S. citizen, you’ll have to sign a request for payment while in the presence of a U.S. diplomat, an officer of a foreign branch of a U.S. bank, a notary or other appropriate official.
  • Cashing out a bond for a minor: A parent may cash out their child’s bond if the child is too young to cash it out.
  • Cashing out when you live in a disaster area: Special provisions exist for those who need to cash out a bond in federally declared disaster areas. For example, even if you cash out a bond that is less than a year old, many banks are likely to waive the holding fee.

Keep reading to see the best ways to invest $10, $100 and $1,000.

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About the Author

Sean joined the GOBankingRates team in 2018, bringing with him several years of experience with both military and collegiate writing and editing experience. Sean’s first foray into writing happened when he enlisted in the Marines, with the occupational specialty of combat correspondent. He covered military affairs both in garrison and internationally when he deployed to Afghanistan. After finishing his enlistment, he completed his BA in English at UC Berkeley, eventually moving to Southern California.