How U.S. Savings Bonds Work: Buying, Gifting, and Redeeming

Can You Still Buy U.S. Savings Bonds?

Young couple meeting with insurance agent
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Savings bonds, once a favorite offering at banks and credit unions, allow you to lend money to the U.S. government. Those instruments are still available, but they’ve evolved. You can buy savings bonds online or with your tax refund, and you can still hand out paper Series I bonds as gifts. That said, the process is harder than it used to be.

What are Savings Bonds?

Savings bonds are securities issued by the U.S. Treasury Department. They provide funding dollars for government operations, and the government pays interest in return for using your money. This page covers traditional Series EE and Series I savings bonds.

Interest Rates on Savings Bonds

Interest rates depend on general economic conditions. As interest rates in the broad economy rise, so do the interest rates paid on savings bonds. For current numbers, visit the U.S. Treasury’s website for current and historical rates.

Rates on savings bonds are roughly in line with interest rates on other safe savings vehicles, such as FDIC-insured bank accounts. Savings bonds are backed by the full faith and credit of the US Government, making the default risk on savings bonds relatively low.

You can probably earn more at an FDIC-insured online bank account, but savings bonds may provide tax benefits in some cases to help enhance your returns.

Potential Tax Benefits

Depending on your situation, you may receive tax benefits from using savings bonds.

Deferral: You may be able to wait until the bond matures or you take certain actions to claim interest income on bonds. Ultimately, you might be able to delay claiming the interest income until you redeem the bonds or give up ownership and have bonds reissued (or until they mature, which is typically 30 years after issue). If you don’t want to claim income now, but you wouldn’t mind claiming it later, savings bonds might help.

Education expenses: Another potential benefit is the Education Tax Exclusion (or Education Savings Bond Program). If you cash in your bonds and use them for qualified higher education expenses, you may be able to exclude that income from taxes. Be sure to follow the rules regarding the type of expenses, income limits, and more. You can find the details at the Savings Bond for Education site.

State and local taxes: Finally, savings bond interest income may be ​exempt from state and local income taxes. As a result, you can potentially spend more of what you earn. Depending on your state, this can be a big deal or almost insignificant.

Verify before claiming: Taxes can be complicated, and the rules change periodically. Speak with a professional tax preparer about your particular situation, your goals, and current laws before you buy or redeem savings bonds. Most importantly, don’t file your taxes without verifying that you’re following all IRS rules.

Restrictions on Redeeming Savings Bonds

If you plan to buy savings bonds, you need to be aware of the restrictions on cashing them in.

  1. You must wait at least 12 months to redeem bonds, so they may not be appropriate for emergency savings.
  2. If you cash out within the first five years, you lose the last three months’ interest.

What About Inflation?

Because they’re relatively safe, savings bonds don’t offer huge returns. As a result, you risk losing value after inflation. With that in mind, savings bonds may be best for situations where you simply can’t afford any risk to principal. If you have a long time until you’ll use the money, it may make sense to at least investigate other options.

Series I savings bonds include a hedge against inflation. You earn a modest fixed rate plus an inflation-adjusted rate. During periods of high inflation, you earn more. When inflation is low, you earn less.

Do Banks Still Sell Savings Bonds?

Traditionally, you could buy U.S. Savings Bonds at banks and credit unions, but that option ended in 2012. The U.S. Treasury only allows U.S. savings bond purchases online or as part of your tax refund. You can still redeem paper savings bonds at most financial institutions.

TreasuryDirect.gov: Buy Savings Bonds Online

The Treasury Department requires you to go online (www.TreasuryDirect.gov) for most new purchases. The process is surprisingly easy and fast if you're only buying bonds for yourself. If you’re internet-savvy, you can be the proud owner of a savings bond in less than ten minutes. However, if you’re still figuring things out online (or if there are any technical glitches or delayed email messages), you may be in for a more frustrating experience.

  1. Create an account. Start by providing standard personal information such as your Social Security Number and date of birth. You also need to set up security questions and answers much like at any other financial website.
  2. Set up funding: Link a bank account to your TreasuryDirect account to fund your savings bond purchases. When you redeem bonds, funds can move directly to your bank account.
  3. Buy bonds: Once you’re up and running, you’re ready to purchase bonds.

How to Buy Savings Bonds as Gifts

Savings bonds are commonly given as gifts, and you can still purchase bonds for somebody else whether you buy online or with your tax return.

Unfortunately, the process of buying online and giving a gift is cumbersome, and it just doesn't feel the same when you can't hand over the physical bond. Still, you may be able to find a symbolic way to let the recipient know that they’re getting something (they just can’t spend it with). Again, Series I bonds are still available in paper form.

To buy a bond as a gift, use your own TreasuryDirect account. But the recipient needs her own account to receive the gift (this is the main drawback of the online system). If the recipient is under age 18, the child's parent or guardian needs to open an account as well (and then open a "Minor Linked Account" under their own account). In addition, you'll need the recipient's Social Security Number when you buy the savings bond.

If the child's parents can't or won't open a TreasuryDirect account, you can still purchase the bonds, hold them in your own account's "Gift Box," and transfer them at a later date.

How to Buy Savings Bonds With a Tax Refund

In addition to buying at TreasuryDirect, you can also buy Series I  U.S. savings bonds with your tax refund. Use Form 8888 to purchase bonds with a portion of your refund. You must buy in $50 increments, and you can get up to $5,000 in bonds at one time. 

When you use your tax refund, you can buy Series I savings bonds in paper form. You can also have the bonds issued in somebody else’s name if you want to give the bond as a gift.

If you receive paper bonds or give them as gifts, owners can redeem the bonds at banks and credit unions. Alternatively, you can exchange paper bonds for electronic bonds in your TreasuryDirect account.

Part 1: Overview of Savings Bonds

Because they’re backed by the full faith and credit of the US Government, the default risk on savings bonds is very small. It is unlikely that the government wouldn’t be able to pay its debts. If things did get that bad, I suspect that you’d have much more urgent problems to deal with (like finding food, shelter, safety, etc).

Restrictions on Redeeming Savings Bonds

If you’re going to invest in savings bonds, you need to be aware of the restrictions on cashing them in. You may not cash in within 6 months or 1 year of the original issue date (6 months for bonds issued before February 2003, 1 year for bonds issued after February 2003). Also, you’ll be penalized for cashing in within the first five years (you lose the last three months’ interest).

Inflation

Because they’re relatively safe, savings bonds don’t offer huge returns. This means you risk watching your earnings get gobbled up by inflation. With that in mind, I recommend using savings bonds for situations where you simply can’t afford any risk to principal. If you have a long time until you’ll use the money, you may want to at least investigate other investments.

If you’re going to use savings bonds, Series I savings bonds include a hedge against inflation. You earn a modest fixed rate plus an inflation-adjusted rate. During periods of high inflation, you earn more. When inflation is low, you earn less.

Part 1: Overview of Savings Bonds
Part 2: Pitfalls and Risks of Savings Bonds
Part 3: How to Buy Savings Bonds

In the past, you could buy US Savings Bonds at banks and credit unions, but those days are behind us. The Treasury only allows purchases online or as part of your tax refund. What's more, if you want paper bonds, the only way to get them is with your tax refund.

You can still redeem paper savings bonds at most financial institutions, but getting new ones is not as easy as it used to be.

If you're looking to buy savings bonds for yourself or as a gift, let's review what your options are under the new rules.

 

TreasuryDirect.gov – Buy Savings Bonds Online

The Treasury Department has a nice website for buying savings bonds. The process is surprisingly easy and fast - as long as you're only buying bonds for yourself. If you’re internet-savvy, you can be the proud owner of a savings bond in less than 10 minutes. However, if you’re still figuring things out online (or if there are any technical glitches or delayed email messages) you may be in for a more frustrating experience.

I personally had a smooth experience when I bought savings bonds at Treasury Direct, but others have been less fortunate. Just be prepared to spend some time at your computer.

The first step is to create an account. You'll have to provide standard personal information such as your Social Security Number and birthday, and you'll have to set up security questions and answers much like at any other financial website. You'll also link a bank account to your TreasuryDirect account to fund your savings bond purchases. Finally, look for an email from TreasuryDirect that confirms your account and provides your account number.

Once you’re logged-in, you can buy a variety of Treasury securities. There is even a “Purchase Express” form on the welcome page if you make a habit of buying savings bonds. This option allows you to quickly add to your holdings without having to type in the same information you always type in.

Buying bonds is almost a little too easy - whether or not you use Purchase Express. I expected more information about what I was doing before actually pulling the trigger, but perhaps I just like to triple-check before clicking. If you tend to move quickly online, make sure you know what you're getting into (how long you have to keep the bonds, for example) before you confirm anything.

 

Buying Savings Bonds as Gifts

Savings bonds are commonly given as gifts, and you can still purchase bonds for somebody else - whether you buy online or with your tax return. Unfortunately, the process of buying online and giving a gift is cumbersome, and it just doesn't feel the same when you can't hand over the actual bond.

To buy a bond as a gift, you'll use your own TreasuryDirect account, but the recipient needs his or her own account to receive the gift (this is the main drawback of the online system). If the recipient is under the age of 18, the child's parent or guardian needs to open an account as well (and then open a "Minor Linked Account" under their own account). In addition, you'll need the recipient's Social Security Number when you buy the savings bond.

If the child's parents can't or won't open a TreasuryDirect account, you can still purchase the bonds, hold them in your own account's "Gift Box," and transfer them at a later date.

 

Purchase Savings Bonds with a Tax Refund

If you have your heart set on buying paper savings bonds, you can do so with your tax refund. However, you can only get Series I bonds with this method.

When you file your taxes, use Form 8888 to purchase bonds with a portion of your refund. You have to buy in $50 increments, and you can get up to $5,000 in bonds at one time. You can of course buy bonds for yourself, and you can also use your refund to purchase savings bonds as gifts; just enter the recipient's name on the form. Your paper bonds will be mailed to you, and you can eventually redeem them at a bank or credit union that works with savings bonds.