What is a Savings Bond?

Does the volatility of the stock market make you anxious? Perhaps you’ve heard about the safety of savings bonds and want to learn more. These low-risk investments may seem to be a secure place to store your money, especially during times of inflation. However, low risk often comes with low returns. So, how do you know if investing in savings bonds is the right choice for you? Whether you are building your retirement portfolio or just looking for a way to invest with minimal risk, use this guide if you want to know: what is a savings bond?

How Do Savings Bonds Work?

When you purchase a U.S. savings bond, you are making a loan to the government. Savings bonds earn interest and mature between 20 and 30 years. You can choose between a savings bond that doubles its value after 20 years or one with an interest rate designed to protect against inflation. When you redeem the bond at the end of the term, you receive the value of the bond plus any earned interest.  

History of Savings Bonds

The U.S. savings bond was first introduced in 1935 by President Franklin D. Roosevelt. As early as 1776, the government issued Treasury marketable securities to raise money. However, these debt instruments could fluctuate in value because of changing market conditions. As an alternative, savings bonds offered a low-risk way to help fund government organization spending.

The U.S. government fully backs savings bonds. Its small denominations also make it easier for more people to save and invest. 

Types of Savings Bonds

Two U.S. Savings bonds are available: Series EE and Series I.

A Series EE savings bond (EE bond) has a 30-year term. The bond accrues a fixed rate of interest every month. On a semi-annual basis, the interest earned is added to the bond’s principal value.

Series EE bonds are guaranteed to double in value if kept for 20 years. Regardless of the interest earned, the EE bond gets a bump in value once it hits the 20-year mark. After 20 years, the interest rate may change for the remainder of its term. 

Series I savings bonds (I bond) protect your investment against inflation. The interest rate paid on an I bond combines a fixed rate plus a rate that changes with inflation. This added rate is adjusted for inflation every six months. Like an EE bond, the interest earned gets added to the I bond’s principal value. 

The primary difference between both types is that an EE bond guarantees to double your investment after 20 years, whereas the I bond protects you from inflation. 

Advantages of Investing in Savings Bonds

Every investment has benefits and drawbacks. Key advantages to investing in savings bonds include:

• Safe investments
• Higher interest rates than a traditional savings account
• There is no withdrawal penalty after you have held the bond for 5 years
• Protection against market fluctuations
• No state tax due
• Can opt to pay federal tax yearly as you earn interest or at the end of the term when you cash out.

Limitations and Considerations

Investing in savings bonds can have its drawbacks, such as:

• Lower rates than comparable investments
• Can only purchase directly from the Treasury.
• Penalized for holding the investment for less than five years.
• Yearly purchase limit of $10,000 for electronic EE and I bonds and $5,000 for paper I bonds. 
• Buying different types of investments can reduce the overall risk in your investment portfolio. Savings bonds typically generate lower returns than stocks and other investments, but they can also lessen volatility in your portfolio. 

How to Purchase Savings Bonds

You can purchase savings bonds directly from the U.S. government. Below is a step-by-step guide to buying bonds through the government’s website:

1. Visit TreasuryDirect.gov.
2. Click the log-in button if you already have an account. If not, choose the option to open a new account.
3. Select the type of account you would like to open.
4. Enter your personal information, including your Social Security number, e-mail address and banking information. 
5. Set your password and security questions.
6. After you have logged in and you have verified your account, select the Buy Direct option.
7. Choose the specific security and the amount you want to buy.
8. Select “Buy” to complete your purchase.

Today, you can only purchase EE savings bonds online. Most I Bonds are purchased through the government online; however, you can buy a paper bond with your tax refund. 

How to Redeem Savings Bonds

When you redeem a savings bond you held until maturity, you get paid face value plus any interest earned. However, if you cash in a savings bond before maturity, you receive whatever you had paid in plus the earnings.

Whether you hold an electronic or paper savings bond, you can redeem a Series EE or Series I bond once you have owned it for one year. The steps you need to take to redeem a savings bond depend on whether it is electronic or paper. 

Electronic bonds: To redeem a bond purchased online, log in to your TreasuryDirect account and use the Manage Direct link to cash your securities. Here are a few things to keep in mind when redeeming savings bonds online:

• You may cash any amount of $25 or more.
• When cashing only part of what the bond is worth, you must leave at least $25 in your account. Plus, you only receive interest on the portion you cashed. 

Paper bonds: You may only redeem a paper savings bond for its entire value, so you cannot cash out just part of a paper bond.

You can redeem a paper EE or I savings bond at your local bank or credit union. Not every bank or credit union cashes savings bonds, or they place a limit on how much you can cash. So, checking their requirements before you go is a good idea.

You may also mail in a request to the Department of Treasury to cash a paper savings bond. Complete Form 1522 and mail this along with the bonds to Treasury Retail Securities Services.

If you have lost your paper bond, you can get more information using Treasury Hunt. You can search for your bonds by entering your full name, state and Social Security number. If the site finds a match, you will get instructions on what to do next.

The Treasury Hunt site is updated monthly. If nothing matches or the information doesn’t seem current, you can check again next month.

Whether you redeem an electronic or paper bond, you can cash a savings bond once you have held it for at least one year. You are penalized three months of interest if you redeem a bond in less than five years.

When you invest in an EE or I bond, you won’t pay state or local tax on your earned interest. However, you do pay federal tax. You can choose to report your earnings every year. Or you can wait until you have redeemed the bond and report all your earnings at one time.

Best Brokers for Purchasing Savings Bonds

Savings bonds can be a valuable addition to your investment portfolio. Find the best broker for purchasing savings bonds below. 

Balance Out Your Investment Portfolio With Savings Bonds

Savings bonds aren’t particularly exciting investments to add to your portfolio. Yet if safety and low risk are important to you, a savings bond may be the right investment for you. 

Frequently Asked Questions