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A savings bond is a long-term investment with the rare ability to be given as a gift. And the recipient may be appreciative, given that some savings bonds have an annual rate of 6.89% through April 30, 2023. Though their returns generally pale when compared to mutual funds or stocks, U.S. savings bonds offer security and are protected against inflation, which can make them a particularly attractive option right now. Let’s break down how they work.
What is a savings bond?
A savings bond is a loan to the U.S. government that’s issued by the U.S. Treasury. When you buy one, you are lending money to the government. You can register yourself or someone else — even if they’re under 18 — as the owner or co-owner of a savings bond. And only a bond’s owner or beneficiary can cash it.
There are two types available for purchase, series EE and series I savings bonds, and you can buy them in an electronic format on the U.S. Treasury’s website, TreasuryDirect.gov. You can’t buy bonds made of paper at banks and brokers anymore, but you can still redeem them at a financial institution. Unlike other types of bonds, you can’t sell savings bonds to other investors or hold them in brokerage accounts.
» Learn more about how bonds work
Series EE vs. Series I
The main difference between these two savings bonds is how their rates work.
A series EE bond has a fixed rate and earns interest plus a guaranteed return of double the value if kept for 20 years. So, regardless of the rate, the bond gets a one-time adjustment at the 20-year mark to ensure the value doubles. (Series EE bonds bought before May 2005 have either a variable or fixed rate, depending on the issue date.)
A series I bond has a rate that combines two things: a fixed rate and an inflation-adjusted rate calculated twice a year. The idea is that your money is protected from inflation, which is the overall rise in prices for goods and services (so you need more U.S. dollars to pay for the same items over time).
» Feeling sustainable? Learn about green bonds
The current rates are 0.10% for a new EE bond and 1.68% for a new I bond. Interest is credited monthly and compounded twice a year. Rates on new bonds change every six months, in April and November, and any series I bonds you own also have semiannual rate changes.
» Curious how savings bond rates compare to CDs’? See the best CD rates
Savings bonds are one of the safest types of investments available because they’re backed by the full faith and credit of the U.S. government. In other words, the government is on the hook for paying you back.
Amounts and limits
You can buy an EE or I bond at face value for any amount from $25 to $10,000, in penny increments. For example, you could buy a bond for $100.45. The annual maximum someone can receive in electronic savings bonds is $10,000. For paper bonds, the annual maximum is $5,000.
Savings bonds earn interest for 30 years, but you can withdraw penalty-free after five years. If you’re familiar with certificates of deposit, you could think of a savings bond like a 30-year CD that becomes a no-penalty CD after the fifth year.
» Curious about CDs? See our explainer on CDs vs. bonds
Early withdrawal penalty
Cashing a savings bond before five years costs you the previous three months of interest. So if you redeem a bond at 20 months, you get the first 17 months of interest. The earliest you can withdraw is after one year. There’s no penalty for withdrawing after five years, but for EE bonds, you lose the opportunity to have your bond double in value if you don’t wait 20 years.
When should I consider a savings bond?
A savings bond might be considered for investors who want to avoid risk and have a long time frame for redemption. You can also give a bond as a gift to loved ones, including children, or bestow someone with inheritance money. But savings bonds aren’t part of investment or bank accounts and aren’t useful for short-term savings goals.
How to buy a savings bond
The main way to buy a savings bond is online through the U.S. Treasury’s website TreasuryDirect.gov; and in fact, that’s the only way to get EE bonds.
For people who want to buy a paper bond, there’s only one way: you have to buy I bonds when filing federal taxes. Buying a paper bond is less convenient, but it can be a more fun way to give as a gift.
How to redeem a savings bond
If it’s a paper bond, you can cash it by visiting a brick-and-mortar bank or credit union. Bring your ID and the savings bond. You’ll generally receive a tax form from the bank either immediately or by mail. If a bank doesn’t accept your bond, see the Treasury’s guide for next steps.
If it’s an electronic bond, log in to your account on TreasuryDirect and follow the instructions to confirm redemption and deposit to a linked checking or savings account. You can expect to receive the money generally within two weekdays.
Savings bonds vs. CDs
Savings bonds are low-risk loans to the U.S. government for up to 30 years, while certificates of deposit are bank accounts with terms generally from three months to five years. Savings bonds and CDs can both be part of an investing strategy that prioritizes stability over high returns.