What it means
Savings bonds are designed for individuals rather than institutions, and they are sold electronically through the Treasury's TreasuryDirect website. You lend money to the government, and it pays you back with interest when you redeem the bond.
Annual purchase limits apply, which keeps them a savings product rather than a large investment vehicle. Series EE bonds earn a fixed interest rate set by the Treasury when the bond is issued, and they are guaranteed to double in value if held for 20 years.
If the fixed rate alone would not achieve that, the Treasury makes a one-off adjustment at the 20-year point. They keep earning interest for up to 30 years in total.
Series I bonds combine two parts: a fixed rate that stays the same for the life of the bond, and an inflation rate that is reset every six months. The result is called the composite rate, and it protects the buyer from losing purchasing power when prices rise.
The rates are announced by the Treasury, so you should check the current figures before buying. There are rules on access.
A savings bond cannot be redeemed during the first 12 months, and if you cash it before five years you lose the last three months of interest. After five years there is no penalty.
On tax, interest on savings bonds is subject to federal income tax but exempt from state and local income tax. You can usually choose to pay the federal tax when the bond is redeemed or matures, instead of each year, which lets the interest compound without a yearly tax bill.
In some cases the interest is excluded from tax when used to pay qualifying education costs. Savings bonds sit at the cautious end of a household balance sheet.
They suit money that must not fall in value, but they are a poor home for funds that may be needed within a year or that could earn more elsewhere over the long term.
In practice
Real-world examples.
Example
A retired teacher wants a safe place for $10,000 of emergency savings that will keep pace with rising prices. She buys Series I bonds, accepts that the money is locked up for 12 months and knows the inflation component will adjust every six months.
Example
A young couple saves for their child's education. They hold Series EE bonds for 20 years knowing the value is guaranteed to double, and they check whether the interest qualifies for the education tax exclusion.
Example
A freelance designer in a state with high income tax prefers savings bonds for part of her reserve fund. Because the interest is exempt from state and local tax, her after-tax return on the bonds beats a bank deposit that pays slightly more before tax.
Formula
Calculation
Series I composite rate = fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)
Suppose the fixed rate is 1.00% and the six-month inflation rate is 1.50%. The composite rate is 1.00% + (2 x 1.50%) + (1.00% x 1.50%) = 1.00% + 3.00% + 0.015% = 4.015%. On a $10,000 holding, one year of interest at this rate is about 10,000 x 0.04015 = $401.50, although the actual rate changes every six months.Case study
Seen in the real world.
Maple Ridge Family Office is an illustrative, fictional adviser to ordinary households. One of its clients, a retired nurse, has $20,000 in a savings account earning little and worries about rising prices.
The adviser suggests moving $10,000 into Series I bonds and keeping $10,000 in an accessible account. The nurse is told the bonds cannot be cashed for 12 months and carry a three-month interest penalty before five years.
In this illustrative story, prices rise sharply the following year and the bonds' composite rate rises with them. The nurse's savings keep their purchasing power, and she is glad she kept a separate cash reserve for emergencies. She also notes that interest is only taxed federally, which helps her after-tax return slightly.
Watch out
Common mistakes.
- Assuming you can cash a savings bond whenever you like, when none can be redeemed in the first 12 months.
- Forgetting the early redemption penalty, which removes the last three months of interest if you redeem before five years.
- Believing the rate you see on one date applies forever, when the inflation part of a Series I bond resets every six months.
Questions
People also ask.
Are savings bonds safe?
They are backed by the US government, so default risk is considered very low, but the value can still lose purchasing power if the rate is below inflation.
Where can I buy savings bonds?
They are sold electronically through the Treasury's TreasuryDirect website, and paper bonds are no longer sold through banks.
Is the interest taxable?
Federal income tax applies, but state and local income tax does not, and you can often defer the federal tax until the bond is redeemed.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related