Your Free Guide to Buying Savings Bonds

Understanding What Savings Bonds Are and How They Work

Savings bonds are financial products issued by the U.S. Treasury Department that allow you to lend money to the federal government. In return, the government promises to pay you back your money plus interest over a set period of time. Think of it as a loan you give to the government instead of a loan the government gives to you.

The U.S. government uses the money raised from savings bonds to fund various operations and infrastructure projects. When you purchase a savings bond, you're essentially purchasing a piece of that funding. The Treasury Department has issued savings bonds for decades as a way for everyday Americans to invest their money in a low-risk manner.

There are currently two main types of savings bonds available to the general public: Series EE bonds and Series I bonds. Series EE bonds earn a fixed interest rate that stays the same throughout the bond's life. Series I bonds, also called inflation bonds, have an interest rate that changes every six months based on inflation rates. This means the amount of interest you earn can increase or decrease depending on economic conditions.

Savings bonds differ from other investments like stocks or mutual funds because they carry virtually no risk. The full faith and credit of the U.S. government backs them, which means they are among the safest investments available. However, this safety comes with a tradeoff: the interest rates on savings bonds are typically lower than what you might earn from stocks or other investments.

When you purchase a savings bond, your money is tied up for a minimum period. For both Series EE and Series I bonds, you must hold them for at least one year before you can cash them in. If you cash in a bond before five years have passed, you'll lose the last three months of interest as a penalty. After five years, you can cash in your bonds without this penalty.

Practical Takeaway: Savings bonds are low-risk loans you give to the federal government that pay you back with interest over time. They work best for money you won't need to access immediately and can hold for several years.

Where to Buy Savings Bonds and Purchase Options

The primary place to purchase savings bonds is through TreasuryDirect, which is the official online platform operated by the U.S. Department of the Treasury. TreasuryDirect allows individuals to buy, hold, and manage their savings bonds electronically without involving a bank or broker. This direct relationship with the Treasury Department means there are no middleman fees or commissions taken out of your purchase.

To use TreasuryDirect, you'll need to create an account on their website at treasurydirect.gov. The process involves providing basic personal information, establishing login credentials, and linking a bank account for purchases and redemptions. Once your account is set up, you can purchase bonds at any time during business hours. The website operates 24 hours a day, seven days a week, though some maintenance windows may occur.

You can also purchase savings bonds through your bank or credit union. Many financial institutions offer this service, though they may charge a small fee for the transaction. This option works well if you prefer to handle all your banking needs in one place or if you're uncomfortable with online transactions. The interest rate and bond terms remain the same whether you purchase through TreasuryDirect or a financial institution.

Series EE bonds can be purchased in amounts as small as $25, with the option to buy in increments of $1 after that. This low minimum purchase price makes savings bonds accessible to people with modest savings. For example, you could purchase a $25 bond, a $50 bond, and a $75 bond if you wanted to diversify your purchases across different time periods. Series I bonds also have a minimum purchase of $25.

When you purchase through TreasuryDirect, your bonds are held in electronic form only. Physical paper bonds are no longer issued for new purchases. However, if you previously owned paper bonds, you can still hold them, and they continue to earn interest. The electronic system makes record-keeping simpler and reduces the risk of lost or damaged bonds.

Timing your purchases can matter slightly because bonds begin earning interest on the first day of the month in which they are purchased. If you buy a bond on January 15th, it begins earning interest from January 1st. This means purchasing early in a month allows your money to start earning interest sooner.

Practical Takeaway: You can purchase savings bonds directly from TreasuryDirect online with no fees, or through your bank with a small fee. The minimum purchase is $25, and bonds are held electronically in your account once purchased.

Interest Rates, Terms, and How Your Money Grows

The interest you earn on savings bonds depends on the type of bond you purchase. Series EE bonds earn a fixed interest rate that the Treasury Department sets every six months. As of recent years, this rate has been in the range of 2.00 percent to 5.30 percent annually, though rates change. When you purchase a Series EE bond, you lock in the rate that applies to bonds purchased that month, and you keep that rate for the entire 30-year life of the bond.

Series I bonds work differently. They have a composite interest rate made up of two parts: a fixed rate and an inflation rate. The fixed rate remains constant for the life of the bond, while the inflation rate changes every six months in May and November. The inflation rate is based on the Consumer Price Index (CPI), which measures how prices for goods and services change over time. When inflation is high, your I bond earns more interest; when inflation is low, your I bond earns less.

For example, if a Series I bond has a fixed rate of 0.40 percent and the inflation rate is 5.27 percent, your total annual rate would be 5.67 percent. Six months later, if inflation has decreased to 3.00 percent, your new rate would be 3.40 percent. This variable rate structure is why Series I bonds are attractive during times of higher inflation, as they protect your purchasing power by increasing your returns when prices are rising.

Series EE bonds have a special feature: they are guaranteed to double in value after 20 years. This means if you purchase a $100 Series EE bond, it is guaranteed to be worth at least $200 after 20 years, regardless of the stated interest rate. This guarantee provides a floor for your returns. In practice, most Series EE bonds are worth more than double because they continue earning interest after the 20-year point.

Interest on savings bonds compounds semiannually, which means every six months your interest earns interest. With compound interest, you earn returns not just on your original investment but also on the accumulated interest. Over time, this compounding effect significantly increases your money. A $10,000 investment in Series I bonds earning an average of 4 percent annually would grow to approximately $14,802 after 10 years due to compounding.

The maximum you can purchase each calendar year depends on your purchase method. Through TreasuryDirect, you can purchase up to $10,000 in electronic bonds per person per calendar year. However, if you have tax refunds, you can purchase up to an additional $5,000 in paper Series EE bonds by directing your tax refund toward bond purchases, for a total of $15,000 per year.

Practical Takeaway: Series EE bonds offer fixed interest rates and double in value after 20 years, while Series I bonds adjust every six months based on inflation. You can purchase up to $10,000 per person annually through TreasuryDirect, with an additional $5,000 possible using tax refunds.

Tax Considerations and When Interest Gets Taxed

The interest you earn on savings bonds is subject to federal income tax, but not to state or local income taxes. This tax treatment is more favorable than many other investments, as you avoid state and local tax burdens entirely. However, you still owe federal taxes on your earnings, and understanding how and when you pay these taxes can help you plan your finances effectively.

You have two options for reporting interest on your federal taxes. First, you can report the interest each year as you earn it, even though you haven't yet cashed in the bond. This is called the annual reporting method. If you choose this approach, you'll receive a Form 1099-INT from the Treasury Department each year showing the interest earned, and you'll include this amount on your tax return.