Free Guide to Savings Bonds and Their Value

What Savings Bonds Are and How They Work

Savings bonds are debt securities issued by the U.S. Department of the Treasury. When you purchase a savings bond, you are essentially lending money to the federal government. In return, the government pays you back the amount you invested plus interest over time. This makes savings bonds a form of investment that carries very low risk because they are backed by the full faith and credit of the United States government.

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There are two main types of savings bonds available to individual investors today: Series EE bonds and Series I bonds. Series EE bonds earn a fixed interest rate that is set when you purchase the bond and remains the same throughout the bond's life. Series I bonds, also called inflation bonds, have interest rates that change every six months based on inflation rates. The combination of a fixed rate and an inflation rate means Series I bonds can provide protection against rising prices.

When you purchase a savings bond, you do not receive a physical certificate. Instead, the Treasury maintains electronic records of your ownership. You can view your bonds and manage them through TreasuryDirect, which is the official online platform of the U.S. Department of the Treasury. As of 2024, you can purchase savings bonds in denominations starting at $25 and in any amount above that.

Savings bonds are considered one of the safest investments available because they have no default risk. The federal government has never failed to honor savings bonds. Additionally, the interest you earn on savings bonds is exempt from state and local income taxes, though you must pay federal income tax on the interest. This tax advantage can make savings bonds particularly valuable for people in higher tax brackets or those living in states with high income taxes.

Takeaway: Savings bonds are low-risk investments where you lend money to the U.S. government and receive interest payments. Understanding the two types (Series EE with fixed rates and Series I with inflation adjustment) helps you choose bonds that match your financial situation.

Understanding Series EE Bonds and Fixed Interest Rates

Series EE bonds have been available to investors since 1941. These bonds earn a fixed interest rate that the Treasury sets and announces every six months. The rate you receive depends on when you purchase the bond. Once you own the bond, that rate stays the same for the entire 30-year life of the bond. As of November 2024, the Series EE bond rate is 4.30% annually for bonds purchased during that period.

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One distinctive feature of Series EE bonds is that they are sold at a discount. You purchase a Series EE bond for half of its face value. For example, a $100 Series EE bond costs $50 to purchase. Over 20 years, the value of the bond increases through the combination of interest earnings and the initial discount, eventually reaching the $100 face value. After 20 years, the bond continues to earn interest at the fixed rate for an additional 10 years, up to the full 30-year maturity period.

The interest on Series EE bonds is compounded semiannually, meaning the interest earned in the first six months gets added to your bond value, and then you earn interest on that larger amount in the next six months. This compounding effect accelerates the growth of your investment over time. For instance, a $50 Series EE bond purchased at 4.30% annual interest will grow to approximately $115 after 20 years, more than doubling the initial investment.

Series EE bonds are particularly useful for people with specific long-term savings goals, such as college education funding. The Treasury offers a tax benefit called the Education Savings Bond Program, which allows certain taxpayers to exclude Series EE bond interest from their taxable income if the proceeds are used to pay qualified education expenses. This can provide significant tax savings for families planning for education costs.

You can cash in Series EE bonds at any time after holding them for one year. If you cash them in before five years have passed, you will lose the most recent three months of interest as a penalty. After five years, you can redeem them without this penalty. This makes Series EE bonds slightly less liquid than other savings options, but the trade-off is higher interest rates compared to regular savings accounts.

Takeaway: Series EE bonds offer predictable, fixed interest rates and are sold at half of face value. The key consideration is the one-year minimum holding period and the three-month interest penalty if redeemed before five years, which means these bonds work best for money you won't need in the immediate future.

Learning About Series I Bonds and Inflation Protection

Series I bonds, introduced in 1998, were created to address a problem with traditional fixed-rate bonds: when inflation rises, fixed interest rates become less valuable because they don't keep pace with rising prices. Series I bonds solve this problem by adjusting their interest rate every six months based on the current inflation rate. The Treasury calculates the composite rate by combining a fixed rate and an inflation rate measurement.

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The inflation rate component of Series I bonds is based on the Consumer Price Index for All Urban Consumers (CPI-U), which the U.S. Bureau of Labor Statistics publishes monthly. This means your Series I bond interest rate moves up and down with actual inflation in the economy. When inflation increases, your Series I bond rate increases. When inflation decreases, your rate may decrease as well. As of November 2024, the Series I bond composite rate is 5.27% annually.

Series I bonds are purchased at face value, not at a discount like Series EE bonds. This means a $100 Series I bond costs exactly $100 to purchase. The bonds come in denominations from $25 up to any amount. The interest compounds semiannually, similar to Series EE bonds. Over a 30-year period, the inflation protection can significantly increase the value of your investment, particularly during periods of high inflation.

One important limitation of Series I bonds is that you cannot redeem them during the first year of ownership. If you redeem them after one year but before five years, you will lose the most recent three months of interest. This makes Series I bonds less suitable for emergency funds or money you might need quickly. However, for long-term savings, the inflation protection can be worth this restriction.

From 2022 through mid-2023, Series I bonds attracted significant attention from savers because inflation rates were historically high. During that period, Series I bonds offered rates exceeding 9% annually. As inflation has moderated, the rates have come down. This shows how Series I bonds can provide strong returns during inflationary periods but offers lower rates during deflationary or low-inflation periods.

Takeaway: Series I bonds protect your purchasing power by adjusting rates based on inflation every six months. This makes them valuable during inflationary periods, but they require at least a one-year holding period and are subject to the same early redemption penalty as Series EE bonds.

The Process of Purchasing and Managing Savings Bonds

All savings bonds are purchased through TreasuryDirect, the official online platform of the U.S. Department of the Treasury. You cannot purchase savings bonds through banks, brokers, or other financial institutions. To purchase bonds, you must first create a TreasuryDirect account on the website treasurydirect.gov. The account creation process requires your Social Security number, date of birth, and valid email address.

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Once your account is established, you need to link a bank account for deposits and withdrawals. You can fund your account through electronic bank transfers. When you purchase bonds, the Treasury withdraws the purchase amount from your linked bank account. TreasuryDirect conducts purchases on a specific calendar schedule. Paper savings bonds are no longer available for purchase; all new bonds are issued in electronic form.

There are annual purchase limits for savings bonds. During each calendar year, you can purchase up to $10,000 of Series EE bonds and up to $10,000 of Series I bonds per Social Security number. Additionally, if you receive a federal income tax refund, you have the option to purchase savings bonds with all or part of that refund through your tax return. The bond purchase limit through tax refunds is $5,000 per series, separate from the $10,000 annual limit mentioned above. This means theoretically you could purchase up to $15,000 of each series in one year: $10,000 through TreasuryDirect and $5,000 with your tax refund.

Once you own savings bonds, you can monitor them through your TreasuryDirect account dashboard. The account shows your current bond holdings, their current value,