Understanding Savings Bonds: What They Are and How They Work
Savings bonds are debt instruments issued by the U.S. Department of the Treasury. When you purchase a savings bond, you are lending money to the federal government. In return, the government agrees to repay you the amount you invested plus interest over a set period of time. Think of it as a formal agreement where you give the government money today, and they give you back more money later.
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There are two main types of savings bonds available to individuals: Series EE bonds and Series I bonds. Series EE bonds earn a fixed rate of interest that is set when you purchase the bond and remains the same throughout the bond's life. Series I bonds, also called inflation bonds, have a variable interest rate that changes every six months based on inflation rates. The rate consists of two parts: a fixed rate and an inflation rate component.
When you buy a Series EE bond, you purchase it at half its face value. For example, a $50 bond costs you $25 to buy. The bond then grows in value as interest accrues. Series I bonds are purchased at face value, meaning you pay the full amount printed on the bond.
Savings bonds are considered very safe investments because they are backed by the U.S. government. Unlike stocks or other investments, the value of your bond will not decrease. The government guarantees that your bond will be worth at least what you paid for it, even if you hold it for only a short time.
The federal government sold over $9 billion in savings bonds in fiscal year 2022, with individuals holding approximately $193 billion in outstanding savings bonds as of recent Treasury reports. This shows that savings bonds remain a popular savings option for millions of Americans.
Practical Takeaway: Savings bonds are loans you make to the federal government that earn interest. Understanding the type of bond you own—whether it earns fixed or variable interest—is the first step in managing your bond holdings effectively.
Bond Maturity: When Your Bond Reaches Full Value
Every savings bond has a maturity date, which is the point at which the bond stops earning interest. For Series EE bonds, the maturity period is typically 30 years from the purchase date. This means a Series EE bond purchased on January 1, 2024, would reach maturity on January 1, 2054. For Series I bonds, the maturity period is also 30 years.
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However, there is an important distinction between the maturity date and the final maturity date. Savings bonds have what is called a "final maturity" date, which is when the Treasury Department will no longer pay interest on the bond or allow you to hold it. For both Series EE and Series I bonds, the final maturity date is 30 years after purchase.
Before a bond reaches its final maturity date at 30 years, it enters what is called the "extended maturity period." During this time, which runs from year 20 to year 30, the bond still earns interest, but the interest rate may change. For Series EE bonds, the Treasury adjusts the interest rate every six months during the extended maturity period. For Series I bonds, the interest rate continues to adjust every six months based on inflation.
You can check the current value of your savings bonds at any time by using the Treasury's Savings Bond Calculator, available on the TreasuryDirect website. This calculator shows you what your bonds are worth on any given date, including how much interest they have earned. You enter information about your bonds—such as the series, denomination, and purchase date—and the calculator provides the current value.
Understanding maturity is important because it affects when you can redeem your bond and how much money you will receive. If you redeem a bond before it matures, you will receive the current redemption value, which includes all interest earned to date. The redemption value grows over time as interest accrues.
Practical Takeaway: Know when your bonds mature by counting 30 years from their purchase date. Use the Treasury's Savings Bond Calculator to track the current value of your bonds and see how much interest they have earned over time.
Redeeming Your Savings Bonds: Timing and Methods
You may redeem a savings bond at any time after you have owned it for one year. This means if you purchase a bond on June 15, 2024, you cannot redeem it before June 15, 2025. However, there is a penalty for redeeming Series EE and Series I bonds before they have been held for five years: you will lose the last three months of interest.
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For example, suppose you own a Series EE bond purchased on January 1, 2023, and you decide to redeem it on March 15, 2024 (after owning it for about 14 months). Even though the bond has earned interest for 14 months, you will only receive the interest for 11 months because three months of interest will be withheld as a penalty.
If you hold a bond for five years or longer, you avoid this three-month interest penalty. This is why financial guidance often suggests keeping savings bonds for at least five years to receive their full interest value. After five years, you can redeem the bond at any time without penalty, though the bond will continue to earn interest if you choose to hold it longer.
There are several ways to redeem savings bonds. If your bonds are registered with TreasuryDirect (the Treasury's online system), you can redeem them electronically through your TreasuryDirect account. The funds are deposited directly into your bank account, typically within one to two business days. If you have paper savings bonds, you can redeem them at most banks and credit unions. The financial institution will verify the bonds, pay you the current redemption value, and may charge a small fee.
You also have the option to redeem bonds through the mail by sending them to the Treasury Department. This process takes longer and requires proper documentation, but it is an alternative if you cannot redeem bonds locally or through TreasuryDirect.
When you redeem a bond, you will owe federal income tax on the interest earned. You do not owe this tax until the year you redeem the bond or the year it matures, whichever comes first. This is an important consideration when planning to redeem bonds—you should budget for the federal income tax liability on the interest portion of your redemption.
Practical Takeaway: Plan to hold bonds for at least five years to avoid the three-month interest penalty. Know which redemption method works best for your situation—TreasuryDirect for electronic bonds or your local bank for paper bonds—and remember that you will owe federal income tax on the interest earned.
Tax Implications and Reporting Requirements
The interest earned on savings bonds is subject to federal income tax, but it is not subject to state or local income taxes. This is a key advantage of savings bonds compared to some other savings vehicles. The interest is exempt from state and local taxation for all U.S. states and territories, which can result in significant tax savings for residents of high-tax states.
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You have two main choices for reporting the interest earned on savings bonds for federal tax purposes. You can report the interest in the year you redeem the bond or in the year the bond matures, whichever comes first. Alternatively, you can choose to report the interest earned each year, even if you do not redeem the bond. This second option is called "accrual basis" reporting and is less common, but it may be beneficial in certain situations, such as if you expect to have lower income in some years.
Most people use the first method: they report interest only when they redeem the bond or when it matures. This allows you to defer the tax liability until you actually receive the money. For example, if you purchase a Series EE bond in 2024 and redeem it in 2030, you would report all the interest earned from 2024 to 2030 on your 2030 tax return.
There is a special tax consideration for education-related savings. If you redeem Series EE or Series I bonds and use the money to pay for qualified education expenses in the same year you redeem the bonds, you may be able to exclude part or all of the interest from your federal income tax. Qualified education expenses include tuition and fees for higher education institutions and certain technical schools. This tax exclusion has income limits and other specific requirements that you