What Are Savings Bonds?
Savings bonds are a type of debt security issued by the U.S. Department of the Treasury to help finance the federal government's borrowing needs. They are considered one of the safest investments available, as they are backed by the full faith and credit of the United States government. As a form of fixed-income securities, savings bonds allow individual investors to lend money to the government, in return for which the government promises to pay back the original principal plus interest rate over a set period37. Unlike many other bonds, savings bonds are non-marketable, meaning they cannot be traded on secondary markets; they are held by the original purchaser or beneficiary until maturity or redemption.
History and Origin
The concept of savings bonds emerged during the Great Depression, with the first Series A savings bond introduced in 1935 to encourage thriftiness and provide an accessible investment option for ordinary Americans36. Their popularity surged dramatically with the introduction of Series E bonds in 1941, commonly known as "War Bonds" or "Defense Bonds," which played a crucial role in financing the United States' efforts during World War II35. These bonds allowed millions of citizens to contribute directly to the war effort, fostering a sense of national participation33, 34. Over the decades, various series of savings bonds have been issued, including Series HH, Series EE, and Series I bonds, each with different terms and interest-earning mechanisms, continually adapting to the needs of American investors32. For example, the Series I bond was introduced in 1998, featuring a rate adjusted for inflation.
Key Takeaways
- Savings bonds are low-risk, interest-bearing debt securities issued by the U.S. Department of the Treasury.
- They are non-marketable, meaning they cannot be bought or sold on a secondary market and are held until redemption or maturity.
- The two currently available types are Series EE and Series I bonds, each with distinct interest calculation methods and features.
- Interest earned on savings bonds is subject to federal income tax but is exempt from state and local income taxes.
- They are often used for long-term savings goals due to their safety and deferred tax benefits.
Interpreting Savings Bonds
When holding savings bonds, an investor is essentially participating in a long-term loan to the U.S. government. The value of savings bonds grows over time through the accrual of compounding interest. For instance, Series EE bonds are sold at a discount (half their face value) and are guaranteed to reach their full par value at their original maturity date, which is typically 20 years, though they continue to earn interest for up to 30 years. Series I bonds, conversely, are purchased at face value and earn a composite rate that adjusts based on a fixed rate and the rate of inflation, helping to protect an investor's purchasing power31. Understanding the specific terms of the bond series held, particularly its interest accrual and final maturity, is key to evaluating its accumulated yield and planning for redemption.
Hypothetical Example
Consider an individual who purchases a $100 Series EE savings bond. This bond is bought for $50 (half its face value). Assuming the bond accrues interest monthly and compounds semiannually, its value grows over time. After 20 years, the bond is guaranteed to be worth at least $100. If held longer, it continues to earn interest for up to 30 years. When the bond is finally redeemed after, say, 25 years, the investor receives the original $50 plus all the accrued interest. For example, if the bond has grown to $120, the investor receives $120, and the $70 in interest earned would be subject to federal income tax at that time, unless an education exclusion applies.
Practical Applications
Savings bonds serve as a foundational component in many financial planning strategies, particularly for conservative investors or those saving for specific long-term goals. They are often used for:
- Long-Term Savings: Their safety and guaranteed returns make them suitable for savings goals such as retirement, a down payment on a home, or significant future expenses.
- Education Funding: Interest earned on savings bonds can be tax-exempt at the federal level if the proceeds are used to pay for qualified higher education expenses at an eligible institution29, 30. This benefit makes them a popular choice for college savings.
- Emergency Funds: While not as liquid as a standard savings account, the ability to redeem savings bonds after a minimum holding period of one year makes them a stable component of an emergency fund.
- Gift Giving: Savings bonds can be purchased as gifts, providing a simple and lasting way to transfer value28.
Individuals can purchase savings bonds electronically through TreasuryDirect, the U.S. Department of the Treasury's official website for buying government securities directly from the government27.
Limitations and Criticisms
Despite their safety, savings bonds have certain limitations that may make them less appealing for some investors. A primary criticism is their relatively low potential for capital appreciation compared to other assets like stocks, particularly during periods of low interest rate environments26. For Series EE bonds, the fixed interest rate can lead to a loss of real purchasing power if inflation outpaces the bond's yield over its holding period25. While Series I bonds are designed to offer protection against inflation, their rates can also decrease if inflation subsides24.
Another limitation is their illiquidity in the short term. Savings bonds cannot be redeemed within the first year of purchase, and early redemption (before five years) typically results in a forfeiture of the last three months of interest. Furthermore, there are annual purchase limits for savings bonds ($10,000 per series per person electronically)22, 23, which restricts their utility for high-net-worth individuals or those seeking to invest larger sums21. Unlike marketable Treasury securities, savings bonds cannot be sold on a secondary market, which means investors cannot benefit from rising bond prices if market interest rates fall.
Savings Bonds vs. Treasury Bills
While both Savings bonds and Treasury Bills are debt securities issued by the U.S. government and considered among the safest investments, they serve different purposes and operate distinctly.
| Feature | Savings Bonds | Treasury Bills |
|---|---|---|
| Maturity | Long-term, typically 20-30 years for full accrual20 | Short-term, ranging from 4 weeks to 52 weeks19 |
| Interest Payment | Interest accrues and compounds, paid at redemption or maturity (deferred)18 | Sold at a discount; interest is the difference between purchase price and face value, received at maturity17 |
| Marketability | Non-marketable; cannot be traded on secondary market | Marketable; can be bought and sold on secondary market16 |
| Purchase Method | Primarily via TreasuryDirect (electronic) or tax refund (paper I bonds, discontinued 2025)14, 15 | Purchased via auction on TreasuryDirect or through a broker13 |
| Redemption | Redeemable after 1 year, with penalty if redeemed before 5 years | Held to maturity, or sold on secondary market12 |
| Purpose | Long-term savings, education, gifts | Short-term cash management, liquidity11 |
The primary confusion between savings bonds and Treasury Bills stems from both being government-backed debt. However, their differing maturities, interest payment structures, and marketability make them suitable for distinct investment horizons and liquidity needs10.
FAQs
What types of savings bonds are currently available?
Currently, the U.S. Treasury issues two main types of savings bonds: Series EE bonds and Series I bonds. Series EE bonds earn a fixed interest rate, while Series I bonds have a composite rate that combines a fixed rate with a variable inflation rate.
How do I purchase savings bonds?
You can purchase electronic savings bonds directly from the U.S. Department of the Treasury's website, TreasuryDirect.gov9. You'll need to set up a free account to buy and manage your bonds online. Historically, some paper Series I bonds could be purchased with a tax refund, but this option will be discontinued from January 1, 20258.
Is interest from savings bonds taxable?
Yes, the interest earned on savings bonds is subject to federal income tax. However, it is exempt from state and local income taxes7. You can choose to defer reporting the interest until the bond matures, is redeemed, or changes ownership6. Additionally, some or all of the interest may be tax-exempt at the federal level if used for qualified higher education expenses5.
Can I lose money on a savings bond?
While savings bonds are backed by the full faith and credit of the U.S. government, making default risk virtually zero, you can experience a loss of purchasing power due to inflation if the bond's interest rate does not keep pace with rising prices3, 4. Additionally, if you redeem a bond within the first five years, you forfeit the last three months of interest.
How long do savings bonds earn interest?
Both Series EE and Series I bonds earn interest for a total of 30 years from their issue date2. After 30 years, they stop earning interest, even if they have not been redeemed1.