We Know: How Savings Bonds Work

What is a savings bond?

Savings bonds are non-transferable treasury securities issued by the United States government. That means the bonds cannot be bought or sold by any secondary party other than the United States Treasury. Savings bonds come in a number of denominations and accrue interest. Bonds may be cashed after a specified holding period, even if it is before the maturity period. Savings bonds are registered securities and may be replaced if lost or stolen.

Are savings bonds a safe investment?

Savings bonds are backed in full by the United States government. The bonds accrue interest, and there is no decrease in the original investment.

Do savings bonds collect interest?

Savings bonds accrue interest. Interest rates depend on when the savings bond was purchased. Some savings bonds earn interest rates on a fixed scale, others are market based, and some have guaranteed rates.

Interest is added to the value of the bonds every six months if the bonds were purchased before 1997. After 1997, the interest earned is added monthly. This applies to Series EE bonds.

Some savings bonds stop earning interest after a certain period. For example, Series E-H bonds that matured prior to November 1965 stop earning interest after 40 years.

Savings bonds may be cashed before their maturity dates; however, if the bonds are cashed before five years, the government imposes a 3-month interest penalty.

Current rate information is available at the U.S. Treasury website. The Treasury announces new interest rates annually on May 1 and November 1.

What are the tax advantages in purchasing savings bonds?

The interest earned from a savings bond is subject to Federal Income taxes. Holders of savings bonds may elect to pay the income tax annually, or defer the tax until the bond matures or the bond is cashed out. There are no state and local taxes imposed. Earnings may be sheltered from the income tax if used towards higher education expenses. Placing a bond in a child's name provides income tax protections.

What types of savings bonds may I invest in?

Currently, investors may purchase Series EE or I savings bonds. Savings bonds include the following types:

  • Series A through E
    • First issued in March 1935.
    • Series E began in 1941 and was used to finance World War II. It was withdrawn from public purchase in 1980.
  • Series EE
    • Replaced the Series E bond.
    • Currently sold at 50% of the face value.
    • Accrues interest every month at market rates.
    • Exempt from federal income taxes if used for higher education.
    • After September 1, 2001, this Series became known as the "Patriot Bonds."
    • Stops earning interest after 30 years.
    • If cashed before five years, incurs a 3-month interest penalty.
  • Series HH
    • Issued in denominations ranging from $500 to $10,000.
    • Accrues interest semi-annually.
    • Matures in ten years.
    • Has not been available since September 1, 2004.
  • Series I
    • Purchased at face value.
    • Grows with inflation indexed savings every year for up to 30 years.
    • Interest accrues monthly.
    • Redemption value of this bond never decreases.

Where do I purchase savings bonds?

Savings bonds are issued by U.S. Treasury. Savings bonds may be purchased directly from the Treasury through Treasury Direct, by automatic debits from bank accounts, through Payroll Savings Plans, or and by banks and financial institutions.

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