Savings Bonds - Overview of How US Savings Bonds Work

Advantages and Disadvantages of Savings Bonds

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Savings bonds used to be a major offering at banks and credit unions. Nowadays, these institutions still redeem bonds, but they don't sell them anymore.

What are savings bonds all about? This page takes you through the basics, how they’re used, and how you can get detailed information about savings bonds that you own.

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

What are Savings Bonds?

Savings bonds are securities issued by the US Treasury Department. They provide funding dollars for the US Government. In return for using your money, the government pays you interest. This discussion covers series ​EE and I savings bonds.

How Much Interest do I Earn on Savings Bonds?

Interest rates depend on general economic conditions. As interest rates in general rise, so do the interest rates paid on savings bonds. If you want exact numbers, you can visit the Federal Reserve's website for current and historical rates. In general, you’ll find that rates are fairly competitive for a safe investment – and you may get some tax benefits to help enhance your returns.

What Tax Benefits do Savings Bonds Offer?

Depending on your situation, you may get some nice benefits from using savings bonds. For starters, savings bonds don’t pay periodic interest subject to income tax. Instead, they increase in value over the years.

This means you can delay claiming the interest income until you redeem the bonds (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 can help.

Another tax benefit is the Educational 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.

Finally, savings bond interest income is exempt from state and local income taxes. This means you can spend more of what you earn. Depending on your state, this can be a big deal or almost insignificant.

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


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. – 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.