What Is a Savings Bond Plan?

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A savings bond plan allows you to have part of your paycheck deposited in a TreasuryDirect account to automatically buy savings bonds.

A savings bond plan allows you to have part of your paycheck deposited in a TreasuryDirect account to automatically buy savings bonds. Investing in savings bonds is extremely low-risk, and these Treasury-issued instruments earn very little in interest.

If you’re looking to boost your savings, you may have the option of contributing to a savings bond plan. Keep reading to learn how savings bond plans work and how to enroll in one if you’re eligible. Get the information you need to decide if a savings bond plan is right for you.

Definition and Examples of a Savings Bond Plan

A savings bond plan is a program that allows you to automatically use part of your paycheck to buy savings bonds. It works the same way as a direct deposit, only instead of having your money automatically sent to a bank account, it goes to a TreasuryDirect account.

  • Alternate name: TreasuryDirect Payroll Savings

You can invest in two types of savings bonds:

  1. Series EE bonds: EE bonds issued after May 2005 offer a fixed rate of return. Those issued between May 1997 and April 2005 pay a variable rate. After 20 years, a Series EE bond will double in value.
  2. Series I bonds: Series I bonds offer a fixed interest rate, plus a semiannual inflation adjustment.

Both types of savings bonds are sold at face value and accrue interest monthly. Interest compounds semi-annually until the bonds reach their 30-year maturity date or you cash them out—whichever happens first. You receive the interest that accrued when you redeem the bond.

You can cash out both types of savings bonds after 12 months, but if you do so within the first five years, you’ll forfeit three months of interest. For example, if you cash out savings bonds after 24 months, you’ll only get 21 months’ worth of interest.

How a Savings Bond Plan Works

To enroll in a savings bond plan, you need to set up a TreasuryDirect account. Once you’ve created the account, you can set up a payroll savings plan. You’ll choose the type of savings bond you invest in and the dollar amount you want to buy. You then set up the transfer the same way you would an automatic direct deposit by entering "TreasuryDirect" as the receiving bank’s name and providing the appropriate account and routing numbers.

The money you deposit is used to buy a non-interest-accruing security called a "Payroll Certificate of Indebtedness," or Payroll C of I, that will fund your savings bond purchases. Once you’ve accumulated enough money to buy a savings bond in your Payroll C of I, the TreasuryDirect system will automatically make the purchase for you. For example, if you wanted to buy $25 I bonds and contribute $12.50 per paycheck every other week, the TreasuryDirect would automatically buy you one $25 bond using your Payroll C of I after your first two paychecks, and then another $25 bond every four weeks after that.

You can purchase up to $10,000 per calendar year of both Series I and Series EE bonds, or a total of $20,000 annually.

Pros and Cons of a Savings Bond Plan

  • Automatic savings

  • Tax advantages

  • Seen as a safer investment

  • Opportunity risk

  • Extremely low interest

  • Penalty for early redemption 

Pros Explained

  • Automatic savings: Setting up a savings bond plan is a good way to save and invest money automatically. The amount of your choice will be directly deposited in your TreasuryDirect account.
  • Seen as a safer investment: Savings bonds are considered safer investments because they’re backed by the full faith and credit of the U.S. government.
  • Tax advantages: Using a savings bond plan comes with several tax advantages. You won’t pay state or local income taxes on the interest you earn, and federal taxes on the interest are deferred until you redeem the savings bonds. Under some circumstances, savings bond interest is exempt from federal income taxes when it’s used for qualifying education expenses.

Cons Explained

  • Opportunity risk: Because they earn low interest rates, savings bonds carry opportunity risk, which is the risk of missing out on a better investment opportunity.
  • Extremely low interest: Because savings bonds are so low risk, you won’t earn much interest through a savings bond plan. For example, Series EE bonds issued between May 2021 and October 2021 earned an annual fixed rate of 0.1%. Series I bonds issued for the same period earned 3.54%, all of which is attributed to the semiannual inflation adjustment.
  • Penalty for early redemption: Although you can cash out the money you invest in a savings bond plan after 12 months, you’ll give up three months’ worth of interest if you redeem your savings bonds before five years.

Key Takeaways

  • A savings bond plan allows you to automatically buy U.S. savings bonds using payroll deposits.
  • To enroll in a savings bond plan, you’ll need to set up a TreasuryDirect account.
  • You can buy Series EE bonds or Series I bonds with your savings bond plan.
  • Savings bonds are seen as lower-risk investments, but that also means you won’t earn much interest.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. TreasuryDirect. "The Payroll Savings Options in TreasuryDirect." Accessed Oct. 25, 2021.

  2. TreasuryDirect. "Series EE Savings Bonds." Accessed Oct. 25, 2021.

  3. TreasuryDirect. "Comparing Series EE and Series I Savings Bonds." Accessed Oct. 25, 2021.

  4. Investor.gov. "Savings Bonds." Accessed Oct. 25, 2021.

  5. IRS.gov. "Using Your Income Tax Refund to Save by Buying U.S. Savings Bonds." Accessed Oct. 25, 2021.

  6. TreasuryDirect.gov. "Fiscal Service Announces New Savings Bonds Rates Series I to Earn 3.54%, Series EE to Earn 0.10%." Accessed Oct. 25, 2021.