Key takeaways
- A U.S. savings bond offers a secure method for saving money, being issued by the Treasury and guaranteed by the U.S. government.
- Savings bonds accrue interest over time until they reach up to 30 years of age, at which point the interest is paid out upon redemption by their holder.
- Electronically purchased savings bonds can be redeemed on the TreasuryDirect website, whereas paper bonds can typically be cashed in at most banking or credit union locations.
Savings bonds represent a form of debt instrument provided by the U.S. government. These differ from conventional bonds as they do not issue regular interest payments; instead, they function like zero-coupon bonds, accruing interest until redemption by their holder. Additionally, these bonds cannot be transferred or resold to third parties, setting them apart from standard bonds.
If you’re thinking about including U.S. savings bonds as part of your personal finance strategy,
savings plan
There are several key points to understand regarding how these bonds function.
What exactly is a savings bond?
Buying savings bonds provides a simple method for people to lend money directly to the government and earn a profit from their investment.
Bonds are issued at a price below their face value; for instance, a $50 Series EE bond might be purchased for $25. These bonds accumulate interest over time.
your gains are compounded
This means that interest is accrued on previously accumulated interest.
U.S. savings bonds have several distinctive features compared to conventional bonds:
| Traditional bond | Savings bond |
|---|---|
| Distributes cash interest regularly | It pays out the accumulated interest when you cash it in. |
| Matures on a predetermined date | Can be claimed anytime beginning one year from the issuance date. |
| The owner is responsible for paying taxes on the interest received. | The owner has the option to report the tax interest income upon receipt or opt for annual reporting instead. |
| Usually liable for local, state, and federal taxes | Subject only to federal taxes |
| The buyer has the option to acquire the bond with any sum of money at will. | The purchaser can only buy up to $10,000 in each type of bond ($20,000 overall) per annum. |
How savings bonds work
Savings bonds function through the accumulation of interest over time, and they
earned interest compounds
Although a savings bond accumulates interest gradually, this accumulated interest is only disbursed when the bond is cashed in.
U.S. savings bonds can solely be cashed in by their owners and cannot be sold to others. These bonds may be redeemed either directly from the government or, for those held as physical certificates, through the government or a banking entity.
U.S. savings bonds can be bought directly from the U.S. government through the Treasury Department’s portal.
TreasuryDirect website
Series EE and Series I bonds can be bought electronically. However, Series I paper bonds can only be acquired using an IRS tax refund, and this option will be available until December 31, 2024.
Every electronic savings bond can be bought with amounts ranging from $25 to $10,000, whereas paper bonds come only in denominations of $50, $100, $200, $500, and $1,000. Additionally, the annual limit for purchasing paper bonds is capped at $5,000.
If a paper bond gets lost, stolen, damaged, or severely defaced, you can request for an electronic replacement bond.
Various kinds of savings bonds
U.S. savings bonds are available in three series; however, only two of these series continue to be issued nowadays.
Series E bonds
To finance itself during World War II, and it kept selling these until 1980 when Series EE bonds replaced them. The issuance of Series E bonds has ceased. Series EE bonds began being distributed in 1980 and remain available currently. Depending on their issue date—either between May 1997 and April 2005—they might have a fluctuating interest rate; otherwise, they could carry a set rate starting from May 2005 onwards. Series I bonds
Series I bonds
Offer more robust shielding from inflation compared to Series EE bonds: These instruments feature both a guaranteed fixed return and a fluctuating inflation-adjusted rate that is determined semiannually, according to the consumer price index.
Is investing in savings bonds worthwhile?
Advantages |
Disadvantages |
Ways to Redeem Savings Bonds for Cash
Series EE and Series I bonds can both be redeemed after one year from their purchase date. However, should you decide to cash them in before reaching five years, you will forfeit the interest for the most recent three months.
Each set of bonds generates interest over a maximum period of 30 years. The longer you keep the bond, the greater the amount of interest it accumulates; however, this accumulation halts once the 30-year mark is surpassed.
Paper bonds can typically be redeemed at various bank or credit union locations, whereas electronic bonds can be cashed through the TreasuryDirect website by logging into your account and adhering to the redemption process instructions. The monetary value of the bond will then be deposited directly into your account.
checking
or
savings account
Within 48 hours of the redemption date.
At least $25 must be redeemed for an electronic bond. There isn’t usually a cap when exchanging paper bonds, though the financial institution processing them might set limits on the amount you’re allowed to exchange simultaneously.
Treasury savings bonds versus corporate bonds
Although U.S. savings bonds are issued by the government,
corporate bonds
are provided by firms aiming to generate funding to bolster their capital. The corporation provides either fixed or adjustable interest rates distributed periodically until the bond reaches its maturity date.
When considering an investment in a corporate bond, you should examine the ratings provided by three major credit rating firms: Standard & Poor’s Global Ratings, Moody’s Investors Service, and Fitch Ratings. Bonds with a Triple-A rating represent the best quality, whereas those classified as “junk bonds” are considered of lower quality.
Unlike with savings bonds, you have the option to sell corporate bonds before they mature, though doing so means accepting less than their full face value. In contrast, savings bonds aren’t transferable to other investors; however, you do have the ability to cash them out at par plus accrued interest once a minimum holding period of one year has passed.
|
Savings bond |
Corporate bond | |
|
Interest | Returns are usually less than those of corporate bonds, often ranging from about 3 percent to 4 percent. | The level of interest greatly depends on the offerings provided by the company. Returns may range from 4 percent to 6 percent. |
|
Accessibility | You have the option to cash in a savings bond starting from one year after your purchase. However, if you decide to do so within the initial five-year period, you’ll lose out on some of the accrued interest. | In order to receive the complete face value of the bond, you have to wait until it reaches its maturity date. If you decide to sell the bond prematurely, you’ll end up forfeiting part of its face value. |
|
Safety | Supported by the U.S. government | Released by the corporation and occasionally supported by corporate assets, these bonds carry more risk compared to U.S.-issued savings bonds. |
Savings accounts compared to savings bonds
While both savings bonds and numerous savings accounts are guaranteed by the U.S. government, they differ in terms of their interest rates and how easily you can access your money.
| Savings accounts | Savings bonds | |
|---|---|---|
|
Interest | A lot of high-yield savings accounts at present offer more interest compared to savings bonds. | Currently, Series EE bonds generate less interest compared to numerous savings accounts, whereas Series I bonds offer returns that align well with those found in competitive savings accounts. |
|
Accessibility | Funds can typically be withdrawn up to six times per month without facing penalties. However, certain banks do not impose such limits, offering greater flexibility for withdrawals. | A bond cannot be redeemed for at least a year, and there will be penalties if you try to cash it in before reaching the five-year mark. |
|
Safety | Supported by the U.S. government | Supported by the U.S. government |
You could opt for a savings account if you aim to grow your savings while retaining the flexibility to access your money whenever needed, whereas a savings bond would be more suitable if you seek fixed returns as part of an investment plan.
Bottom line
Treasury savings bonds are some of the most secure investments.
investment types
as secure as any form of government-supported investment like
online high-yield savings accounts
Several aspects to ponder prior to purchasing a savings bond encompass the interest rate provided as well as the timing of when you’ll require accessing your money.
An additional secure option instead of savings bonds and savings accounts is
certificates of deposit
These often provide better interest rates and are typically available through federally backed banks and credit unions.
– Freelance writer
Sarah George
participated in revising this entry.
Staff writer
James Royal, Ph.D.
were involved in earlier editions of this piece
.
