The Ultimate Savings Bond Guide

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Americans have been investing in U.S. savings bonds for nearly 85 years. The money raised helped pay for World War II — and has helped millions of small investors save for their future.

Savings bonds are great gifts to help young people learn to save for their own education and other goals. While the interest rates on savings bonds are sometimes below current market rates, the low initial purchase of $25 makes them a great way for new investors to start saving for goals such as retirement.

And giving savings bonds to children is an effective way to introduce them to the benefits of saving early.

What are savings bonds?

Savings bonds are securities issued by the U.S. government that have a history dating back to 1935, when President Franklin D. Roosevelt signed legislation authorizing the Department of the Treasury to sell the first bonds, nicknamed baby bonds.

Savings bonds were called defense bonds, and then war bonds after the Japanese attack on Pearl Harbor in 1941. Bond purchases helped finance the war effort. This era also saw the start of the ability to purchase savings bonds through payroll deductions, a program that continues today.

After the war, savings bonds evolved into a way for Americans to continue to save. Some people even resisted cashing in older bonds so that they could continue to earn interest. With bonds available as small as $25, savings bonds were frequently used as gifts to young people to celebrate their birth, the observation of a religious event or graduation.

Over the years, the government has made a variety of savings bond series available, ranging from A, B, C and D in the early years to E, EE, H, HH and I. Savings bonds are available online through TreasuryDirect, part of the Treasury Department’s Bureau of the Fiscal Service.

Types of savings bonds

The government has issued several series of savings bonds over the years. While people may continue to own and earn interest on prior series, the government now makes two types of savings bonds available: Series EE and Series I.

Series EE bonds

The government started issuing the current Series EE bonds in May 2005. The bonds earn a variable rate of interest that is announced twice a year — May 1 and Nov. 1. From Nov. 1, 2018, through April 30, 2019, EE bonds will earn 0.10% interest. Older EE bonds earn interest at different rates. Bonds bought from May 1997 through April 2005 earn interest at a rate that changes every six months. EE bonds bought before May 1997 earn interest at different rates and for different guaranteed periods that depend on when they were purchased. For example, a savings bond purchased in April 1994 earned 4% interest compounded semiannually for 18 years.

Today, you can purchase Series EE bonds in denominations between $25 and $10,000. The $10,000 limit applies per year, per Social Security number. Investors can buy Series EE bonds amounts to the penny. That means, for example, that you can buy a bond for $62.56. Series EE bonds earn interest for up to 30 years. While you can cash an EE bond after one year, you will lose the last three months of interest if you cash cash within five years. Before EE savings bonds, the government sold Series E bonds. While these bonds have stopped earning interest, you can still cash them in (more details below).

Series I bonds

The other type of savings bond offered today is Series I. These bonds earn interest at a rate that the government determines by combining a fixed rate (which you know when you purchase the bond) and an inflation rate that is calculated twice a year in May and November. For the period from Nov. 1, 2018, to April 30, 2019, the interest rate on Series I bonds is 2.83%.

Series I bonds are available both electronically through TreasuryDirect and in paper form. But you can only buy a paper Series I bond when you file your federal income tax return. The minimum purchase for electronic bonds is $25. The minimum purchase for paper bonds at tax time is $50. The maximum purchase each calendar year for electronic bonds is $10,000. The maximum purchase for paper bonds is $5,000 each calendar year.

As with Series EE bonds, electronic Series I bonds are available in any denomination down to the penny between $25 and $10,000. Paper bonds are available in $50, $100, $200, $500 and $1,000 denominations up to the $5,000 limit. Series I bonds earn interest for 30 years unless you redeem them earlier. You can redeem bonds as early as a year after purchase. But if you do so before five years, you lose the last three months of interest.

Both Series EE and Series I bonds are fully taxable for federal income tax purposes unless you use the proceeds for education. Series EE and I bonds are exempt from state income tax. You can exclude Series EE and I bond interest from your gross income if you redeem bonds bought after 1989 to pay qualified higher education expenses at an eligible institution.

While there are requirements to qualify for the exclusion, you generally must redeem the bonds in the same year you pay the expenses, as well as meet certain income requirements. Qualified expenses are those you pay to a college, university or vocational school and include tuition and fees for yourself, your spouse or a dependent. Qualified expenses do not include room and board.

How to buy and cash savings bonds

Let’s continue our breakdown, first by going step by step.

Buying savings bonds, step by step

There are several ways investors can buy savings bonds.

The easiest way is through the TreasuryDirect website. To purchase either Series EE or I bonds, you will need to open an account. You can also use the account to buy other U.S. Treasury securities, including Treasury bills and Treasury bonds. All savings bonds you buy through TreasuryDirect are electronic — no paper bonds are issued. But electronic bonds are impossible to lose and easy to cash in.

There is a second way to buy Series I savings bonds (but not Series EE) in paper form at tax time when you file your federal income tax return. When you file the return, you will need to include IRS Form 8888. Purchasers will need to fill out part two to tell the IRS they want to use all or part of their refund to purchase paper Series I bonds. You do not need a TreasuryDirect account, and you must make purchases in multiples of $50. If you don’t use your entire refund, you can elect to have the balance refunded by either direct deposit or check. In each calendar year, you can use up to $5,000 of your refund to buy Series I savings bonds.

The third way to purchase savings bonds is through payroll deductions. Thousands of employers have offered employees the ability to buy savings bonds via payroll deductions since the 1930s. The Treasury Department expanded the program in 2004. As long as a company’s payroll system offers voluntary deductions, employees can have part of their pay transferred into their TreasuryDirect account and use it to buy either Series EE or I savings bonds. All you need to do is set up a TreasuryDirect account. Then, provide your employer with your TreasuryDirect account number and routing number and the amount you want them to transfer into your account each pay period. Employees can schedule savings bond purchases to coincide with payroll deductions.

How to cash old savings bonds

Here’s how you cash in a savings bond, depending on whether it is paper or electronic:

  • You can cash savings bonds as soon as a year after purchase. But you will lose the last three months of interest if you cash one within five years. Since bonds earned interest for varying periods of time depending on when you purchased them, many older bonds no longer earn interest. To find out if your bond is earning interest, go to TreasuryDirect’s Savings Bond Calculator. If your bond no longer earns interest, it may be wise to redeem it and reinvest the proceeds.
  • Electronic bonds are easy to cash. Go to your TreasuryDirect account and follow the steps outlined there. Use the link for redeeming securities in ManageDirect. The Treasury Department will deposit the sale proceeds into your account. You can then use the money to buy more bonds or ask them to distribute the money to you.
  • Paper bonds are a bit more complicated to cash in. In general, you can cash paper bonds at most local financial institutions. Before you go, it’s a good idea to call the bank to make sure they cash savings bonds, and also to find out what identification you need to bring, especially if you don’t have an account at that branch. Some banks may not cash in bonds for non-customers or limit the dollar value they will cash in a single transaction.
  • If visiting a bank isn’t convenient, you can also cash in your paper bonds by mailing them to Treasury Retail Securities Services, P.O. Box 214, Minneapolis, MN 55480-0214. Besides the bonds, you will need to send your Social Security number and direct deposit information on FS Form 5396, which is available on the TreasuryDirect website.
  • The Treasury Department doesn’t impose any limits on the dollar volume of bonds you can cash in a single transaction, but individual banks may. Call ahead to find out about any restrictions.

Building savings bonds into your investment strategy

It’s easy to include savings bonds in your investment strategy. Here are some things you should consider.

Should I invest in U.S. savings bonds?

All investments have risks. Because savings bonds, like all other Treasury obligations, are backed by the full faith and credit of the U.S. government, they are among the safest investments you can make. Safety is an important concern for many investors, particularly new or younger investors who are just learning what it means to invest for their future and starting out slowly or older investors on a fixed income. Another advantage of savings bonds is the low initial investment of just $25. That makes them available to virtually all investors, particularly those with only a small amount to invest.

The disadvantage of savings bonds is the relatively low return they pay, particularly with Series EE bonds. The rate on Series EE bonds is just 0.10% until April 30, 2019. By comparison, a savings account could pay an APY of 1.50% or higher. Most of those accounts have relatively low minimum deposits and might be a place where investors can find a higher return without needing to hold the account for five years to earn the full amount of interest as savings bonds require.

Series I bonds pay a somewhat higher return — 2.83% until April 30, 2019. But with a similar five-year holding requirement to earn the full amount of interest, it might be appropriate to compare this return to five-year certificates of deposit, most of which are insured by the Federal Deposit Insurance Corp. Five-year CDs are paying slightly more than Series I savings bonds — just over 3% as of February 2019. But since interest rates are rising and the interest rate on Series I bonds adjusts every six months, the savings bonds may ultimately provide a higher return over five years compared to a CD, where the interest rate is fixed for those five years. The penalty for redeeming a CD before it matures might be somewhat higher, too.

Bond funds vs. individual bonds

When you buy either Series EE or I savings bonds, you are buying individual bonds.

While the ease and convenience of buying savings bonds makes them attractive for small investors, you might want to consider the benefits of investing in a bond mutual fund at a certain point as the amount you have invested grows.

Most bond mutual funds own dozens — if not hundreds — of bonds depending on the size of the fund. This provides an unparalleled element of diversity that owning individual bonds cannot provide for most investors unless they have a large amount to invest. Owning a diversified fund can also provide protection at a time when interest rates are declining because the fund will own bonds with different interest rates and maturities. While you will ultimately decide what’s best for you, bonds may take on a less important role as you have more money to invest.

Timing your bond investments right

The more information you have about savings bonds when you buy them, the better decision you will make about whether they belong in your portfolio. Both Series EE and I announce interest rate changes twice a year and are effective May 1 and Nov. 1 for the next six months. That means buying savings bonds just after the Treasury Department announces the new rates gives you the best possible information about what your bonds will earn. Since we are in a climate of rising interest rates, it might be reasonable to expect that rates on your savings bond purchases will continue to increase — or at the very least remain stable. As noted above, it is a good idea for potential savings bond investors to compare returns with comparable investments such as savings accounts, Treasury bills and CDs so that they can assure themselves they are making the best possible investment decision.

Savings bonds FAQ

Many children received savings bonds as gifts when they were born or for milestones such as a first communion or bar mitzvah. What you should do depends on your age. Depending how old you are, the bond may still earn interest. But if you are older, your bond may no longer earn interest, at which point you should cash it in and reinvest the proceeds. You can check out the value of your bond in your TreasuryDirect account if you own the bond electronically, or via the Savings Bond Calculator.

Initially called defense bonds, the name was changed to war bonds after Japan’s attack on Pearl Harbor on Dec. 7, 1941. The U.S. government used the proceeds to fund its defense activities during World War II and beyond. The government said about 18% of its war debt was funded by war bonds. The bonds earned interest at a rate of 2.92%, which was generally below the prevailing rate of interest at the time. The government issued war bonds between 1941 and 1980. The bonds had a 10-year maturity. Bonds sold between 1941 and 1965 earned interest for 40 years. Bonds sold after 1965 earned interest for 20 years. War bonds were zero-coupon bonds, meaning they sold for 75% of their face value and then paid full value at maturity. That means you would pay $18.75 for a $25 bond. War bonds were available in denominations from $25 to $10,000, with some limitations.

The U.S. government sold Patriot Bonds for 10 years from December 2001 to December 2011. The bonds were paper Series EE bonds with the words “Patriot Bond” printed near the top of the bond. Otherwise, all normal terms for EE bonds applied. Patriot Bonds offered Americans a way to express their support for U.S. anti-terrorism activities. The government deposited bond sale proceeds into a fund that supported anti-terrorism efforts.

If you own a paper bond, you can track its value in TreasuryDirect’s Savings Bond Calculator. You will need to know the series of the bond and when you purchased it. You can even save your bond inventory in the calculator, so you won’t have to input all the information again. If you have an account with TreasuryDirect and own your savings bond electronically, all you need to do is log in to your TreasuryDirect account to find out the current value.

How much a savings bond purchased today will be worth 10 or 20 years in the future depends on how interest rates change over time. Both Series EE and I bonds earn variable rates of interest that have the potential to change every six months. Without a crystal ball, it is impossible to predict what interest rate the bonds will pay in the future. You can keep track of current and historical interest rates on your bond purchase via TreasuryDirect.

Here is a quick review:

  • You need a TreasuryDirect account to purchase Series EE and I savings bonds unless you buy them at tax time with your refund.
  • Electronic savings bonds are available in any amount, down to the penny, between $25 and $10,000. Paper Series I bonds are available between $50 and $5,000.
  • Interest rates on both Series EE and I bonds change on May 1 and Nov. 1.
  • Both Series EE and I bonds are fully subject to federal (but not state) income tax unless used to pay a qualified education expense.
  • You can cash in both Series EE and I bonds one year after purchase. If you cash them within five years, you lose the last three months of interest. How you cash them in depends on how you hold them. Cash in electronic bonds via TreasuryDirect or redeem paper bonds by mail or at a local bank.
  • You can buy electronic Series EE and I bonds by setting up a TreasuryDirect account and contributing to that account through payroll deductions.

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